paper 16 advanced financial accounting and reporting · paper 16 – advanced financial accounting...

Revisionary Test Paper_Final_Syllabus 2008_Dec2014

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)

Group – IV

Paper 16 – Advanced Financial Accounting and Reporting

1. (a) Venus Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2014 at ` 1,000 lakhs. As at that date the value in use is ` 800 lakhs and the net selling price is ` 750 lakhs. From the above data: (i) Calculate impairment loss. (ii) Give journal entries for adjustment of impairment loss. (iii) Show, how impairment loss will be shown in the Balance Sheet.

1. (b) Ashmit Ltd. entered into a sale deed for its immovable property before the end of the year. But registration was done with registrar subsequent to Balance Sheet date. But before finalisation, is it possible to recognise the sale and the gain at the Balance Sheet date? Give your view with reasons.

1. (c) A private limited company manufacturing fancy terry towels had valued its closing stock of inventories of

finished goods at the realisable value, inclusive of profit and the export cash incentives. Firm contracts had been

received and goods were packed for export, but the ownership of these goods had not been transferred to the

foreign buyers. Comment on the valuation of the stocks by the company.

1. (d) During the year, the Software division supplied a special program for a foreign firm on a consideration of ` 200 lakhs. It was found on June 1st, 2014 that the foreign firm has become bankrupt. The company had received an advance of ` 100 lakhs in the year ended 31st March, 2014 from the foreign firm. 1. (a) Solution . (i) Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Thus, Impairment loss = Carrying amount – Recoverable amount* = `1000 lakhs – ` 800 lakhs = ` 200 lakhs *Recoverable amount is higher of asset’s net selling price ` 750 lakhs and its value in use `800 lakhs. ∴ Recoverable amount = ` 800 lakhs Journals

ii) Particulars Debit Amount (` in lakhs)

Credit Amount (` in lakhs)

a) Impairment loss A/c Dr. To Asset A/c (Being the entry for accounting impairment loss)

200 200

b) Profit and loss A/c Dr. To Impairment loss A/c (Being the entry to transfer impairment loss to profit and loss account)

200

200

(iii)

Balance Sheet of Venus Ltd. as on 31.3.2014 ` in lakhs

Asset less depreciation Less: Impairment loss

1000 200



800

1. (b) Solution. Yes, it is possible for Ashmit Ltd. to recognize the sale and the gain at the balance sheet date according to AS 9* ‘Revenue Recognition’. It is evident that the significant risks and rewards of ownership had passed before the balance sheet date and the delay in transfer of property was merely because of formality in getting the transfer deed registered. Further the registration post the balance sheet date confirms the condition of sale at the balance sheet date as per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’. 1. (c) Solution. Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower of historical cost and net realisable value. AS 9 on “Revenue Recognition” states, “at certain stages in specific industries, such as when agricultural crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenue. In such cases, when sale is assured under forward contract or a government guarantee or when market exists and there is a negligible risk of failure to sell, the goods invoiced are often valued at Net-realisable value.” Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into account the facts stated, the closing stock of finished goods (Fancy terry towel) should have been valued at lower of cost and net-realisable value and not at net realisable value. Further, export incentives are recorded only in the year the export sale takes place. Therefore, the policy adopted by the company for valuing its closing stock of inventories of finished goods is not correct. 1. (d) Solution. Sales to foreign firm: This is an event occurring after the balance sheet date and the accounts are only at draft stage. In accordance with para 13 of AS-4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date, adjustments to assets and liabilities are required. Hence the sum of ` 100 lakhs (` 200 lakhs – advance of ` 100 lakhs) should be provided for by way of provision for bad debts. 2.(a) M/s Prima Co. Ltd. sold goods worth ` 50,000 to M/s Y and Company. M/s Y and Co. asked for discount of ` 8,000 which was agreed by M/s Prima Co. Ltd. The sale was effected and goods were despatched. After receiving, goods worth ` 7,000 was found defective, which they returned immediately. They made the payment of ` 35,000 to M/s Prima Co. Ltd. Accountant booked the sales for ` 35,000. Please discuss 2.(b) A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2014, when the exchange rate was `53 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2014 when the exchange rate was `57 per US Dollar. However, on 31st March, 2014, the rate of exchange was `58 per US Dollar. The company passed an entry on 31st March, 2014 adjusting the cost of raw materials consumed for the difference between `57 and `53 per US Dollar. In the background of the relevant accounting standard, is the company’s accounting treatment correct? Discuss 2. (a) Solution. As per Para 4.1 of AS 9 “Revenue Recognition”, revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In the given case, M/s Prima Co. Ltd. should record the sales at gross value of `50,000. Discount of `8,000 in price and goods returned worth `7,000 are to be adjusted by suitable provisions. M/s Prime Co. Ltd. might have sent the credit note of ` 15,000 to M/s Y & Co. to account for these adjustments. The contention of the accountant to book the sales for `35,000 is not correct. 2.(b) Solution. As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary items denominated in a foreign currency should be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken into profit and loss account. Sundry creditors is a monetary item, hence should be valued at the closing rate i.e., `58 at 31st March, 2014 irrespective of the payment for the same subsequently at lower rate in the next financial year. The difference of `5 (58-53) per US dollar should be shown as



an exchange loss in the profit and loss account for the year ended 31st March, 2014 and is not to be adjusted against the cost of raw- materials. In the subsequent year, the company would record an exchange gain of Re.1 per US dollar, i.e., the difference between `58 and `57 per US dollar. Hence, the accounting treatment adopted by the company is incorrect.

3.(a) Amit purchased a computer for `44,000 and leased out it to Sumit for four years on leases basis, after the lease period , value of the computer was estimated to be `3,000; which she realized after selling it in the second hand market. Lease amount payable at the beginning of each year is ` 22,000; `13,640; `6,820 & `3,410. Depreciation was charged @ 40% p.a. You are required to pass the necessary journal entries in the books of both Amit and Sumit. 3.(b) A Company belonging to the process industry carries out three consecutive processes. The output of the first process is taken as input of the second process, and the output of the second process is taken as input of the third process . The final product emerges out of the third process. It is also possible to outsource the intermediate products. It has been found that over a period time cost of production of the first process is 10% higher than the market price of the intermediate product available freely in the market. The company has decided to close down the first process as a measure of cost saving (vertical spin off) and outsource. Should this event be treated as discontinuing operation?

3. (a) Solution: Journal Entries

In the books of Amit

Particulars Dr. Cr.

1st

Purchase of Computers: Computer A/c Dr. To, Bank A/c

44,000

44,000

Payment of first Year’s Lease: Bank A/c Dr. To, Lease Rent A/c

22,000

22,000

Depreciation for First Year: Depreciation A/c Dr. To, Computer A/c

17,600

17,600

Transfer to Profit & Loss Account: Profit & Loss A/c Dr. To, Depreciation A/c Lease Rent A/c Dr. To, Profit & Loss A/c

17,600

22,000

17,600

22,000

2nd

Payment of Second Year’s Lease: Bank A/c Dr. To, Lease Rent A/c

13,640

13,640

Depreciation for Second Year: Depreciation A/c Dr. To, Computer A/c

10,560

10,560


10,560

13,640

10,560

13,640

3rd

Payment of Third Year’s Lease: Bank A/c Dr. To, Lease Rent A/c

6,820

6,820



Depreciation for Third Year: Depreciation A/c Dr. To, Computer A/c

6,336

6,336


6,336

6,820

6,336

6,820

4th

Payment of Fourth Year’s Lease: Bank A/c Dr. To, Lease Rent A/c

3,410

3,410

Depreciation for Fourth Year: Depreciation A/c Dr. To, Computer A/c

3,802

3,802


3,802

3,410

3,802

3,410

Sale of Leased assets: Bank A/c Dr. Loss on Sale A/c Dr. To, Computer A/c

3,000 2,702

5,702

In the books of Sumit

Particulars Dr. Cr.

Purchase of Computer: No Entry

Payment of First Year’s Lease: Lease Rent A/c Dr. To, Bank A/c

22,000

22,000

Depreciation for First Year: No Entry

Transfer to Profit & Loss Account: Profit and Loss A/c Dr. To, Lease Rent A/c

22,000

22,000

Payment of Second Year’s Lease: Lease Rent A/c Dr. To, Bank A/c

13,640

13,640

Depreciation for Second Year: No Entry


13,640

13,640

Payment of Third Year’s Lease: Lease Rent A/c Dr. To, Bank A/c

6,820

6,820

Depreciation for Third Year: No Entry


6,820

6,820

Payment of Fourth Year’s Lease: Lease Rent A/c Dr.

3,410



To, Bank A/c 3,410

Depreciation for Fourth Year: No Entry


3,410

3,410

Sale of Lease Assets: No Entry

3. (b) Solution. The change made by the company is focused on outsourcing of services, in respect of one single process – in a sequence of process. The net effect of this change is closure of facility relating to process. This has been done by the company with a view to achieving productivity improvement and savings in costs. Such a change does not meet definition criteria in paragraph 3(a) of AS 24- namely, disposing of substantially in its entirety, such as by selling a component of the enterprise in a single transaction. The change is merely a cost-saving endeavor. Hence, this change over is not a discontinuing operation. 4. (a) On 1

st April, 2014 Good Morning Ltd. offered 100 shares to each of its 500 employees at ` 50 per share.

The employees are given a month to decide whether or not to accept the offer. The shares issued under the plan (ESPP) shall be subject to lock- in on transfers for three years from grant date. The market price of shares of the company on the grant dated is `60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at `56 per share. On 30

th April, 2014, 400 employees accepted the offer and paid `30 per share purchased. Normal value

of each share is `10. Record the issue of shares in the books of the company under the aforesaid plan. 4. (b) Beautiful Ltd. acquired 30% of Ugly Ltd. Shares for `4,00,000 on 01-06-2013. By such an acquisition Beautiful Ltd. can exercise significant influence over Ugly Ltd. During the financial year ending on 31.03.2013 Ugly Ltd. earned profits `1,60,000 and Declared a dividend of `1,00,000 on 12.08.2013. Ugly Ltd. reported earnings of `6,00,000 for the financial year on 31.03.2014 and declared dividends of `1,20,000 on 12.06.2014. Calculate the carrying amount of investment in: (i) Separate financial statements of Beautiful Ltd. as on 31.03.2014 (ii) Consolidated Financial Statements of Beautiful Ltd. as on 31.03.2014 (iii) What will be the carrying amount as on 30.06.2014 in consolidated financial Statements? 4. (a) . Solution. Fair value of an ESPP = `56-`50= `6.00 Number of shares issued = 400 employees X 100 shares / employee= 40,000 shares Fair value of ESPP which will be recognized as expenses in the year 2013-2014= 40,000 shares X ` 6 = `2,40,000 Vesting period = 1 month Expenses recognized in 2013-2014 = ` 2,40,000

Journal Entry

Date Particulars Dr. `

Cr. `

30.04.2014 Bank A/c (40,000 shares X `50) Dr. Employees compensation expenses A/c Dr. To, Share Capital A/c (40,000 shares X `10) To, securities Premium (40,000 shares X `46) ( Being shares issued under ESPP @ `50.00)

20,00,000 2,40,000

4,00,000 18,40,000



4. (b) Solution. (i) Carrying Amount of Investment in Separate Financial Statement of Beautiful Ltd. as on 31.03.2014

`

Amount paid for investment in Associate ( on 1.06.2013) 4,00,000

Less: Pre- acquisition dividend (` 1,00,000 X 30% ) 30,000

Carrying Amount as on 31.03.2014 as per AS 13 3,70,000

(ii) Carrying Amount of Investment in Consolidated Financial Statements of Beautiful Ltd. as on 31.03.2014 as per AS 23

`

Carrying amount as on 31.03.2014 3,70,000

Add: Proportionate Share of Profit of investee as per equity method (30% of ` 6,00,000) 1,80,000

Carrying Amount as on 31.03.2014 5,50,000

(iii) Carrying Amount of Investment in Consolidated Financial Statement of Beautiful Ltd. as on 30.06.2014 as per AS 23

`


Less: Dividend Received (`1,20,000 X 30%) 36,000


5. The following particulars are stated in the Balance Sheet of M/s Tamarind Ltd. as on 31.03.2012: (` in Lakhs)

Deferred Tax Liability (Cr.) Deferred Tax Assets (Dr.) The following transactions were reported during the year 2012-13: (i) Tax Rate 50% (ii) Depreciation – As per Books Depreciation – for Tax purposes There were no addition to Fixed Assets during the year (iii) Items disallowed in 2011-12 and allowed for Tax purposes in 2012-13 (iv) Interest to Financial Institutions accounted in the Books on accrual basis, but actual payment was made on 30.09.2013 (v) Donations to Private Trusts made in 2012-13 (vi) Share issue expenses allowed under 35(D) of the I.T. Act, 1961 for the year 2012-13 (1/10th of ` 50.00 lakhs incurred in 2008-2009) (vii) Repairs to Plant and Machinery ` 100.00 lakhs was spread over the period 2012- 13 and 2013-14 equally in the books. However, the entire expenditure was allowed for Income-tax purposes

20.00 10.00

50.00 30.00

10.00 20.00

10.00

5.00

Indicate clearly the impact of above items in terms of Deferred Tax liability/Deferred Tax Assets and the balances of Deferred Tax Liability/Deferred Tax Asset as on 31.03.2013. 5. Solution.

Impact of various items in terms of deferred tax liability/deferred tax asset

Transactions Analysis Nature of difference

Effect Amount

Difference in Generally, written down value method of Responding Reversal ` 20 lakhs X



depreciation

depreciation is adopted under IT Act which leads to higher depreciation in earlier years of useful life of the asset in comparison to later years.

timing difference

of DTL

50% = ` 10 lakhs

Disallowances, as per IT Act, of earlier years

Tax payable for the earlier year was higher on this account.

Responding timing difference

Reversal of DTA

` 10 lakhs X 50% = ` 5 lakhs

Interest to financial institutions

It is allowed as deduction under section 43B of the IT Act, if the payment is made before the due date of filing the return of income (i.e. 31st October, 2013).

No timing difference

Not applicable

Not applicable

Donation to private trusts

Not an allowable expenditure under IT Act

Permanent difference

Not applicable

Not applicable

Share issue expenses

Due to disallowance of full expenditure under IT Act, tax payable in the earlier years was higher.

Responding timing difference

Reversal of DTA

` 5 lakhs X 50% = ` 2.5 Lakhs

Repairs to plant and machinery

Due to allowance of full expenditure under IT Act, tax payable of the current year will be less.

Originating timing difference

Increase in DTL

` 50 lakhs X 50% = ` 25 lakhs

Deferred Tax Liability Account

Dr. Cr.

` in lakhs

` in lakhs

31.3.2013 To Profit and Loss A/c (Depreciation) To Balance c/d

10.00

35.00

1.4.2012 By Balance b/d By Profit and Loss A/c (Repairs to plant)

20.00 25.00

45.00 45.00

1.4.2013 By Balance b/d 35.00

Deferred Tax Assets Account

Dr. Cr.

` in lakhs

` in lakhs

1.04.2012 To Balance b/d

10.00

31.03.2013 By Profit and Loss Account: Items disallowed in 2011-12 and allowed as per I.T. Act in 2012-13 Share issue expenses By Balance c/d

5.00 2.50 2.50

10.00 10.00

1.4.2013 To Balance b/d 2.50

6. Prasad Ltd. had the following borrowing during a year in respect of capital expansion.

Plant Cost of Asset Remarks

Plant A 100 Lakhs No specific Borrowings

Plant B 125 Lakhs Bank loan of `65 Lakhs at 10%

Plant C 175 Lakhs 9% Debenture of ` 125 lakhs were issued

In addition to the specific borrowings stated above, the Company had obtained term loans from two banks (1) ` 100 lakhs at 10% from Corporation Bank and (2) `110 lakhs at 11.5% from State Bank of India, Meet its capital expansion requirements. Determine the borrowing costs to be capitalized in each of the above plants, as per AS-16.



6. Solution: A. Computation of Actual Borrowing Costs incurred during the year:

Source Loan Amount ` in Lakhs Interest Rate Interest Amount ` in Lakhs

Bank Loan 65.00 10% 6.50

9% Debentures 125.00 9% 11.25

Term Loan from Corporation Bank 100.00 10% 10.00

Term Loan from State Bank of India 110.00 11.5% 12.65

Total 400.00 40.40

Specific Borrowing included in above

190.00 17.75

B. Weighted Average Capitalization Rate for General Borrowings:

= Borrowing Specific -Borrowing Total

Borrowing Specificon Interest -Interest Total= 190400

75.1740.40

= %79.10210/65.22 lakhs

C. Capitalization of Borrowing Costs under AS-16 will be as under:

Plant Borrowing Loan Amount ` in lakhs

Interest rate Interest amount ` in lakhs

Cost of Asset

` in Lakhs ` in Lakhs

A General 100 10.79% 10.79 110.79

B Specific 65 10.10% 6.50 71.50

General 60 10.79% 6.47 66.47 137.97

C Specific 125 9.00% 11.25 136.25

General 50 10.79% 5.39 55.39 191.64

Total 400 40.40 440.40

Note: The amount of borrowing costs capitalized should not exceed the actual interest cost. 7. The Balance Sheet of Jupiter Ltd. as on 31st March, 2014 is as under: (` in Lakhs)

Liabilities ` Assets `

Equity Shares `10 each Reserves (including provision for taxation of `300 lakhs) 5% Debentures Secured Loans Sundry Creditors Profit & Loss A/c Balance from previous B/S `32 Profit for the year (After taxation) `1100

3,000

1,000

2,000 200 300 1,132

Goodwill Premises and Land at cost Plant and Machinery Motor Vehicles (purchased on 1.10.13) Raw materials at cost Work-in-progress at cost Finished Goods at cost Book Debts Investment (meant for replacement of Plant and Machinery) Cash at Bank and Cash in hand Discount on Debentures Underwriting Commission

744 400

3,000 40

920

130

180

400

1,600



192 10 16

7,632 7,632

The resale value of Premises and Land is `1,200 lakhs and that of Plant and Machinery is `2,400 lakhs. Depreciation @ 20% is applicable to Motor Vehicles. Applicable depreciation on Premises and Land is 2%, and that on Plant and Machinery is 10%. Market value of the Investments is `1,500 lakhs. 10% of book debts is bad. In a similar company the market value of equity shares of the same denomination is `25 per share and in such company dividend is consistently paid during last 5 years @ 20%. Contrary to this, Jupiter Ltd. is having a marked upward or downward trend in the case of dividend payment.

Past 5 years’ profits of the company were as under:

2008-09 `67 lakhs

2009-10 (-) `1,305 lakhs (loss)

2010-11 `469 lakhs

2011-12 `546 lakhs

2012-13 `405 lakhs

The unusual negative profitability of the company during 2009-10 was due to the lock out in the major manufacturing unit of the company which happened in the beginning of the second quarter of the year 2008-09 and continued till the last quarter of 2008-09.Value the Goodwill of the Company on the basis of 4 years’ purchase of the Super Profit. (Necessary assumption for adjustment of the Company’s inconsistency in regard to the dividend payment, may be made by the examinee). 7. Solution:

Calculation of capital employed

Present value of assets: ` (in lakhs) ` (in lakhs)

Premises and land Plant and machinery Motor vehicles (book value less depreciation for ½ year) Raw materials Work-in-progress Finished goods Book debts (400 x 90%) Investments Cash at bank and in hand

1,200 2,400 36 920 130 180

360 1,500 192

Less: Liabilities: Provision for taxation 5% Debentures Secured loans Sundry creditors

300 2,000

200 300

6,918

2,800

Total capital employed on 31.3.14 4,118

2. Profit available for shareholders for the year 2013-14 ` (in Lakhs)

Profit for the year as per Balance Sheet Less: Depreciation to be considered Premises and land 24* Plant & machinery 240* Motor vehicles 4

1,100

268

Less: Bad debts

832 40

Profit for the year 13-14 792



3. Average capital employed ` (in Lakhs)

Total capital employed Less: ½ of profit for the current year [Refer point 2]

4,118 396

Average capital employed 3,722

* Depreciation on premises and land and plant and machinery have been provided on the basis of assumption that the same has not been provided for earlier

4. Average profit to determine Future Maintainable Profits ` (in lakhs)

Profit for the year 2013-14 Profit for the year 2012-13 Profit for the year 2011-12 Profit for the year 2010-11

792 405 546 469

2212 / 4 553

5. Calculation of General Expectation: Jupiter Ltd. pays `2 as dividend (20%) for each share of `10. Market value of equity shares of the same denomination is `25 which fetches dividend of 20%. Therefore, share of `10 (Face value of shares of Jupiter Ltd.) is expected to fetch (20/25)x10 = 8% return. Since Jupiter Ltd. is not having a stable record in payment of dividend, in its case the expectation may be assumed to be slightly higher, say 10%

6. Calculation of super profit ` (in Lakhs)

Future maintainable profit [See point 4] Normal profit (10% of average capital employed as computed in point 3)

553.00 372.2o

Super Profit 180.80

7. Valuation of Goodwill ` (in Lakhs)

Goodwill at 4 years’ purchase of Super Profit 723.20

Notes: (1) It is evident from the Balance Sheet that depreciation was not charged to Profit & Loss Account. (2) It is assumed that provision for taxation already made is sufficient. (3) While considering past profits for determining average profit, the years 2008-09 and 2009-10 have been left out, as during these years normal business was hampered. 8. (a) Given- (i) Future Maintainable Profit before Interest-` 125 Lakhs; (ii) Normal Rate of Return on Long Term Funds is 20% and on Equity Funds is 25%; (iii) Long Term Funds of the Company is `320 Lakhs of which Equity Funds is ` 210 Lakhs; (iv) Interest on loan Fund is 18%. Find out leverage effect on the Goodwill if tax rate is =30%. 8. (a) Solution. A. Long Term Loan Funds= Total Long Term funds Less Equity Funds= ` (320-210) lakhs= `110 Lakhs Interest at 18% thereon = ` 110 Lakhs X18% = ` 19.80 lakhs B. Computation of Future Maintainable Profit (` in Lakhs)

Particulars Shareholders funds approach Long Term Funds approach

Profit Before Interest Less: Interest on Long Term Loan

125.00 19.80

125.00 N.A

Future Maintainable Profits before tax Less : Tax Expense at 30%

105.20 31.56

125.00 37.50



Future Maintainable Profit after tax 73.64 87.50

C. Computation of Goodwill under different approaches (` in Lakhs)

Particulars Shareholders’ funds approach Long Term Funds approach

a. Future Maintainable Profit after tax

73.64 87.50

b. Normal Rate of Return 25% 20%

c. Normal Capital Employed =(a÷b) 294.56 437.50

d. Actual Capital Employed (given) 210.00 320.00

e. goodwill= (c-d) 84.56 117.50

Hence, Leverage Effect on Goodwill = (` 117.50 – ` 84.56)Lakhs = ` 32.94 Lakhs. 8. (b) From the following information , calculate the value of a share if you want to (i) Buy a small lot of Shares; (ii) Buy a controlling interest in the Company

Year Profit (`) Capital Employed (`) Dividend %

2011 27,50,000 1,71,87,500 12

2012 80,00,000 4,00,00,000 15

2013 1,10,00,000 5,00,00,000 18

2014 1,25,00,000 5,00,00,000 20

The market Expectation is 12%. 8.(b) . Solution: (i) Buy a Small Lot of Shares If the purpose of valuation is to provide data base to aid decision of buying a small (non- controlling) position of the equity of a company, dividend yield method is most appropriate. Dividend rate is rising continuously, weighted average will be more appropriate for calculation of average dividend.

Year Rate of Dividend Weight Product

2011 12 1 12

2012 15 2 30

2013 18 3 54

2014 20 4 80

10 176

Average Dividend = 10

176= 17.6%

Value of share on the basis of dividend for buying a small lot of shares will be

raten expectatioMarket

rate dividend Averageshareper 67.146.100

12

6.17100 Rs

(ii) Buy a Controlling Interest in the Company

If the purpose of valuation is to provide data base to aid a decision of buying controlling interest in the company, total profit will be relevant to determine the value of shares as the shareholders have capacity to influence the decision of distribution of profit. As the profit is rising, weighted average will be more appropriate for calculation of average profit/ yield.

Year Yield % (Profit/ capital employed) X 100 Weight Product

2011 16 1 16

2012 20 2 40

2013 22 3 66



2014 25 4 100

10 222

Average yield = 10

222= 22.2%

If controlling interest in the company is being taken over , then the value per share will be

= raten expectatioMarket

rate yield Averageshareper 187.100.

%12

%2.22100 RsRs

9. The Balance Sheet of Vijay Limited as on 31.12.2014 is as follows:

Liability ` ( in lakhs)

Assets ` ( in lakhs)

2,00,000 equity shares of ` 10 each Fully paid 2,00,000 equity shares of ` 6 each, Paid up fully Reserves and Surplus Liabilities

20 12

8 20

Goodwill Fixed assets Other tangible assets Intangible assets (Market Value) Miscellaneous expenditure to the extent not written off

10 30 10

6 4

60 60

Fixed assets are worth `48 lakhs. Other tangible assets are revalued at `6 lakhs. The company is expected to settle the disputed bonus claim of ` 1 lakh not provided for in the accounts. Goodwill appearing in the balance sheet is purchased goodwill. It is considered reasonable to increase the value of goodwill by an amount equal to average of the book value and a valuation made at 3 year’s purchase of average super-profit for the last 4 years. After tax, profit and dividend rates were as follows:

Year PAT (` in lakhs) Dividend%

2011 6.0 11%

2012 7.0 12%

2013 8.0 13%

2014 8.2 14%

Normal expectation in the industry to which the company belongs is 10%. Rahim holds 40,000 equity shares of ` 10 each fully paid and 20,000 equity shares of `6 each, fully paid up. He wants to sell away his holdings. A. Determine the break-up value and market value of both kinds of shares. 9. Solution. WN # 1 : Computation of terminal capital employed:

Particulars ` in lakhs ` in lakhs

a. Assets : i. Fixed Assets ii. Other tangible assets iii. Intangible assets b. Outside Liabilities i. Sundry liabilities ii. Bonus Payable

48.00

6.00 6.00

20.00 2.00

60.00

22.00



c. Terminal Capital Employed (a-b) 38.00

WN # 2 : Future Maintainable Profits

Year PAT (Given) Weights Weight × PAT

2008 6.0 1 6.0

2009 7.0 2 14.0

2010 8.0 3 24.0

2011 8.2 4 32.8

Future Maintainable Profits= 4321

8.3224146

=

10

8.76.Rs=`7.68 Lakhs

WN # 3 :

Particulars ` in Lakhs

a. Terminal Capital Employed b. NRR c. Normal Profit (a x b) d. Future Maintainable Profit (WN # 3) e. Super Profit (d-c) f. Number of years purchase g. Goodwill (e x f)

38.00 10%

3.8 7.68 3.88

3 11.64

WN # 4 : Incremental goodwill to be considered for valuation of shares An amount equal to average of book value as per valuation


a. Value as per books b. As per valuation ( WN # 3)

c. Simple average of above 𝑎+𝑏

2

10.00 11.64 10.82

d. Total Goodwill [b+c] 20.82

WN # 5 : Ascertainment of breakup- value


a. Net trading assets ( at fair value) (WN # 1) b. Add : Non- trading assets c. Add: goodwill (WN # 4) d. Net assets available to equity shareholders e. No. of shares of ` 10 equivalent shares i. ` 10 Shares 2,00,000 ii. ` 6 Shares 1,20,000 f. Value of ` 10 shares

g. Value of ` 6 shares )10

676.17(

38.00 NIL

20.82 48.82

3.2 Lakhs shares `15.26

` 9.15

WN # 6 : Ascertainment of market value- Dividend capitalization method

(a) Dividend per share = weighted average dividend of last four years as the % of dividend shows as a trend



= 4321

)414()313()212()111(

= 10

56392411 =

10

130=13%

(b) Dividend per share of ` 10 shares = `1.30

` 6 shares = `0.78

(c) Market value of ` 10 shares = %10

30.1=` 13.00

` 10 shares = %10

78.0=` 7.80

WN # 7

Fair value of share if controlling interest is being sold

The fair value of share is ascertained as the simple average of net assets value per share and earning capitalization method value per share.

Particulars ` 10 Shares ` 6 Shares

a. Value as per net assets method b. Value as per earnings capitalization method (WN # 8) c. Fair value [(a+b)/2]

17.76 24.00 20.88

10.66 14.40 12.53

WN # 8

Value of shares as per Earnings Capitalisation Method

Particulars Amount `

a. Future Maintainable Profit 3.84 lakhs

b. Normal rate of return 10%

c. Net trading assets 38.40 lakhs

d. Add: Non-trading assets Nil

e. Value of business 38.4 lakhs

f. Number of shares [ equivalent ` 10 shares] 1.6 lakhs

g. Value per shares of ` 10 shares (e÷ f) `24.00

h. Value per shares of ` 10 shares [(24÷10) X 6] `14.40

10. The following is the Balance Sheet of Utkal Ltd. on 31st

December,2011:- (` in Lakhs)


5,00,000 Equity Shares of ` 100 each 12,000 9% Preference Shares of ` 100 each Reserves & Surplus Secured Loans

500.00 12.00

1,031.50 1048.73

Fixed Assets Current Assets Loans & Advances

1,701.63 1,657.60

719.50



Unsecured Loans Current Liabilities & Provisions

382.77 1,103.73

Total 4,078.73 Total 4,078.73

The Company has been granted a new industrial license for the manufacture of a product, the capital costs of the project are estimated at `9 Crores. The company desires to finance the new project to the extent of `4 Crores partly by accepting public deposits and partly from out of international resources, the balance of `5 Crores by way of issue of fresh Equity Capital at a premium of ` 150 per share. You are required to submit a report to the Directors of the Company stating your reasons whether or not the premium amount of ` 150 per share would be justified. The following further information is made available to you enable you to prepare the report-

i. Rate of dividends on Equity Shares for the last five years were-

Year 2007 2008 2009 2010 2011

rates 18% 20% 20% 22% 22%

ii. Turnover for the last three years were: 2009-`30 Crores; 2010- `35Crores;2011- `40Crores.

iii. Anticipated annual turnover of the new project for the next three years will be `8 Crores. iv. Net profit before Tax had remained around 5 % on sales during the last three years . It is expected that

the same would go upto 7% in the future on account of internal savings and the sales of the new product.

v. Rate of income tax to be taken at 40%. vi. The trend of market price of Equity shares of the Company as per quotation in Stock Exchange was as

under-

Year High Low

2009 `525 `400

2010 `535 `420

2011 `550 `450

10. Solution .

Note: Since the Company’s turnover , Dividend Rates and Share Price are on the increasing trend over the past few years, the premium of ` 150 per share on the new issue will be justified if –

Projected EPS is comparable with the past EPS earned by the Company.

PE Ration after premium issue is comparable with Industry Norms.

A. Computation of PE Ratio (` in Lakhs)

Particulars 2009 2010 2011

Sales 3000.00 3,500.00 4,000.00

Net profit at 5 % of sales Less: Tax expense at 40% of net profit

150.00 60.00

175.00 70.00

200.00 80.00

Profit after tax Less: Preference dividend (` 12,00,000 X 9%)

90.00 1.08

105.00 1.08

120.00 1.08

Residual earnings available to Equity Shareholders Number of Equity Shares

88.92 5 lakhs

103.92 5 lakhs

118.92 5 lakhs

Earnings per share Average Market Price = (Max + Min)÷ 2

` 17.78 (525+400)÷2

=462.50

`20.78 (535+ 420) ÷2

=477.50

`23.78 (550+ 450)÷2

=500.00

Price Earnings Ratio (MPS÷EPS) 26.20 22.98 21.03

2. Computation of Future Maintainable EPS for next three years



Particulars 2012 2013 2014

Sales Turnover: Existing turnover (based on `5 Crore annual increase) New Project.(given)

4,500.00

800.00

5,000.00

800.00

5,500.00

800.00

Total Sales 5,300.00 5,800.00 6,300.00

Net profit before tax at 7 % of turnover Less: Tax expenses at 40%

371.00 148.40

406.00 162.40

441.00 176.40

Profit After Tax Less: Preference Dividend at 9 %

222.60 (1.08)

243.60 (1.08)

264.60 (1.08)

Future earnings available to Equity Shareholders 221.52 242.52 263.52

Weights 3 2 1

Weighted Product 664.56 485.04 263.52

Weighted Average [(666.56 + 485.04 + 263.52)÷6] 235.52

Number of shares [5 lakhs + (` 5 Crore ÷ ` 250)} 7 lakhs

Projected EPS [ ` 235.52 lakhs ÷ 7 lakhs shares] `33.65

Issue Price ( including Premium) `250

Hence , Projected PE Ratio based on issue price `250÷ ` 33.65 =7.43

Note : Since future earnings show an increasing trend, weighted Average is more appropriate. Hence, more weightage is given to profits of near future years since these profits can be estimated with more reasonable certainty than profits of subsequent future years.

3. Justification of Issue at Premium

Particulars Analysis Effect for Premium

(a) Trend of PAT , Residual Earnings available to Equity Shareholders

Increasing Trend of PAT and Residual Earnings of Shareholders

Favourable , Positive

(b) Comparison of Projected EPS with past EPS of the Company

Increasing Trend Favourable , Positive

(c) Comparison of Projected EPS with that of Industry Average

Assuming Industry Average PE Ration is about 7-8, the Company’s projection are considered positive.


(d) Comparison of Issue Price (`100+ ` 150=` 250) with Average Market Price for the past three years

Since Issue Price is below Average Market Price, there will be sufficient takers for the Company’s Shares.


Conclusion: On the above grounds, the Issue Price of `250 (including Premium of ` 150) is justifiable. However , since the Average Market Price is substantially higher than the proposed issue price, it is advisable that the Company put its issue price nearer the average market price , by fixing a higher premium. 11. J Ltd., and K Ltd., had the following financial position as at 31st March, 2014.

Liabilities J Ltd. `

K Ltd. `

Assets J Ltd. `

K Ltd. `

Share capital : Equity shares of `100 each fully

paid

48,00,000 36,00,000 Goodwill 30,00,000 6,00,000

General Reserve 18,00,000 12,00,000 Fixed Assets 24,00,000 42,00,000

Investment Allowance Reserve - 18,00,000 Investment at cost 18,00,000 12,00,000

Current Liabilities 24,00,000 9,00,000 Current Assets 18,00,000 15,00,000

90,00,000 75,00,000 90,00,000 75,00,000



It was decided that J Ltd. will take over the business of K Ltd., on that date, on the basis of the respective share values adjusting, wherever necessary, the book values of assets and liabilities on the strength of information given below : i. Investment of K Ltd., included 6,000 shares in J Ltd., acquired at a cost of ` 150 per share. The other

investments of K Ltd., have a market value of ` 1,50,000; ii. Investment Allowance Reserve was in respect of additions made to Fixed assets by K Ltd., in the years 2013-

2014 on which Income Tax relief has been obtained. In terms of the Income Tax Act, the company has to carry forward till 2016, reserve of ` 9,00,000 for utilisation;

iii. Goodwill of J Ltd., and K Ltd., are to be taken at ` 24,00,000 and ` 12,00,000 respectively; iv. The market value of investments of J Ltd., was ` 12,00,000; v. Current assets of J Ltd., included ` 4,80,000 of stock in trade obtained from K Ltd. which company sold at a

profit of 25% over cost ; vi. Fixed assets of J Ltd., and K Ltd., are valued at ` 30,00,000 and ` 45,00,000 respectively.

Suggest the scheme of absorption and show the journal entries necessary in the books of J Ltd. Also prepare the Balance Sheet of that company after takeover of the business of K Ltd. Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer should be as per Revised Schedule VI.

11. Solution. Part I: Purchase Consideration WN # 1 : Intrinsic Value of Shares

Particulars J Ltd. (`) K Ltd. (`)

Goodwill 24,00,000 12,00,000

Fixed assets 30,00,000 45,00,000

Investment-Outside 12,00,000 1,50,000

-Inter Co [6,000 Shares @`125 each] ------ 7,50,000

Current assets 18,00,000 15,00,000

Liabilities (24,00,000) (9,00,000)

Net assets 60,00,000 72,00,000

No. of shares outstanding 48,000 36,000

Intrinsic Value per share (60,00,000/48,000); (72,00,000/36,000) 125 200

WN # 2 : Purchase Consideration

Particulars K Ltd. (`)

Total no. of Shares outstanding in K Ltd. 36,000

Value of Shares @`200 each 72,00,000

No. of shares issuable on the basis of intrinsic value of share (72,00,000÷125) 57,600

Less: Shares already held (6,000)

No. of Shares to be issued 51,600

Shares price 125

Purchase Consideration (51,600×125) 64,50,000

Part II : In the Books of J Ltd.

Nature of Amalgamation-Purchase

Method of Accounting-Purchase

Particulars Debit (`) Credit (`)

1. For Purchase Consideration Due Business Purchase A/C To Liquidator of K Ltd. A/C

Dr.

64,50,000

64,50,000

2. For Assets and Liabilities taken over:



Goodwill A/C Fixed Assets A/C Investment A/C Current Assets A/C To Liabilities A/C To Business Purchase A/C

Dr. Dr. Dr. Dr.

12,00,000 45,00,000

1,50,000 15,00,000

9,00,000 64,50,000

3. For Discharge of purchase consideration Liquidator of K Ltd. A/C To Equity Share Capital A/C To Securities Premium A/c

Dr.

64,50,000

51,60,000 12,90,000

4. Contra entry for statutory reserve Amalgamation adjustment A/C To Investment allowance A/c

Dr.

9,00,000

9,00,000

5. For adjustment of stock reserve Goodwill A/C To Stock reserve A/C

Dr.

96,000

96,000

Name of the Company: J Ltd.

Balance Sheet as at 31.03.2014

Ref No. Particulars Note No. As at 31st March, 2014 As at 31st March, 2013

` `

I. Equity and Liabilities

1 Shareholders’ funds

(a) Share capital 1 99,60,000

(b) Reserves and surplus 2 39,90,000

(c) Money received against share warrants

2 Share application money pending allotment

3 Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions

4 Current Liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities 3 33,00,000

(d) Short-term provisions

Total 1,72,50,000



II. Assets

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 4 69,00,000

(ii) Intangible assets 5 42,96,000

(iii) Capital work-in-progress

(iv) Intangible assets under development

Non-current investments 6 19,50,000

Deferred tax assets (Net)

Long-term loans and advances

Other non-current assets 7 9,00,000

2 Current assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets 8 32,04,000

Total 1,72,50,000

(`)

Note 1. Share Capital As at 31st

March, 2014 As at 31st

March, 2013

Authorised, Issued, Subscribed and paid up:- 99,600 Equity Shares of ` 100 (of which 51,600 shares of ` 1,00 each issued for consideration other than cash)

99,60,000

Total 99,60,000

RECONCILATION OF SHARE CAPITAL

FOR EQUITY SHARE :- As at 31st March, 2014 As at 31st March, 2013

Nos. Amount (`) Nos. Amount (`)

Opening Balance as on 01.04.11 48,000 48,00,000 NIL NIL

Add: Fresh Issue (Incld Bonus shares, Right shares, split 51,600 51,60,000 NIL NIL



shares, shares issued other than cash)

99,600 99,60,000 NIL NIL

Less: Buy Back of shares - - - -

99,600 99,60,000 NIL NIL

Note 2. Reserves and Surplus As at 31st March, 2014 As at 31st March, 2013

Securities Premium 12,90,000

Investment allowance Reserve 9,00,000

General Reserve 18,00,000

Total 39,90,000

Note 3. Other Current Liabilities As at 31st March, 2014 As at 31st March, 2013

Current Liabilities 33,00,000

Total 33,00,000

Note 4. Tangible assets As at 31st March, 2014 As at 31st March, 2013

Fixed Assets (24,00,000+45,00,000) 69,00,000

Total 69,00,000

Note 5. Intangible assets As at 31st March, 2014 As at 31st March, 2013

Goodwill 42,96,000

Total 42,96,000

Note 6. Non-Current Investments As at 31st March, 2014 As at 31st March, 2013

Investment at cost 19,50,000

Total 19,50,000

Note 7. Other Non Current Assets As at 31st March, 2014 As at 31st March, 2013

Amalgamation Adjustment Accounts 9,00,000

Total 9,00,000

Note 8. Other Current Assets As at 31st March, 2014 As at 31st March, 2013

Current Assets (33,00,000 – 96,000) 32,04,000

Total 32,04,000

12. The Balance Sheet of Googly Ltd. as on 31.3.2014 is given :



(` in ‘000)

Liabilities Amount `

Assets Amount `

Share Capital : Equity shares of ` 10 each Securities Premium General Reserve Profit and Loss Account 10% Debenture Creditors

1,600

200 1,560

240 4,000

640

Fixed Assets Non-trade Investments Stock Sundry Debtors Cash and Bank

5,400 600

1,200 720 320

8,240 8,240

Gunshot Ltd. buy back 32,000 shares of ` 20 per share. For this purpose, the Company sold its all non-trade investments for ` 6,40,000. Give Journal Entries with full narrations effecting the buy back. 12.Solution. Journal Entries for Buy-back of shares of Googly Ltd. ` `

(i) Bank A/c Dr. To Non-trade Investments To Profit & Loss A/c (Being the entry for sale of Non-trade Investments)

6,40,000

6,00,000

40,000

(ii) Shares Buy back A/c (32,000 x ` 20) Dr. To Bank A/c (Being purchase of 32,000 shares @ `20 per share)

6,40,000 6,40,000

(iii) Equity Share Capital A/c (32,000 x `10) Dr. Buy-back Premium (32,000 x `10) Dr. To Shares Buy-back A/c (Being cancellation of shares bought back)

3,20,000 3,20,000

6,40,000

(iv) Securities Premium A/c Dr. General Reserve A/c Dr. To Buy-back Premium (Being adjustment of buy-back premium)

2,00,000 1,20,000

3,20,000

(v) General Reserve A/c Dr. To Capital Redemption Reserve (Being the entry for transfer of General Reserve to Capital Redemption Reserve to the extent of face value of equity shares bought back)

3,20,000 3,20,000

13. Red Ltd. and Blue Ltd. propose to amalgamate. Their balance sheets as at 31

st March,2014 were as follows:

Liabilities Red Ltd Blue Ltd Assets Red Ltd. Blue Ltd.

Share Capital Equity shares of ` 10 each General Reserves Profit and Loss Account Creditors

15,00,000

6,00,000 3,00,000 3,00,000

6,00,000

60,000 90,000

1,50,000

Fixed Assets: Less: Depreciation Investments ( Face value of ` 3 lakhs ,6% Tax free G.P notes) Stock Debtors Cash and Bank balance

12,00,000

3,00,000

6,00,000 5,10,000

90,000

3,00,000

----

3,90,000 1,80,000

30,000

27,00,000 9,00,000 27,00,000 9,00,000



Their Net Profit (after taxation) were as follows:

Year Red Ltd. Blue Ltd.

2011-12 3,90,000 1,35,000

2012-13 3,75,000 1,20,000

2013-14 4,50,000 1,68,000

Normal trading profit may be considered as 15% on closing capital invested. Goodwill may be taken as 4 year’s purchase of average super profit. The stock of Red Ltd. and Blue Ltd. are to be taken at ` 6,12,000 and ` 4,26,000 respectively for the purpose of amalgamation. Green Ltd. is formed for the purpose of amalgamation of two companies. Assume Tax Rate 40%. (a) Suggest a Ratio of exchange of shares and (b) Draft the opening balance sheet of Green Ltd (revised schedule VI format is not required). 13. Solution. (i) Scheme of Capitalization of Green Ltd. and ratio of exchange of shares Computation of Net Assets of amalgamating companies

Red Ltd. Blue Ltd.

Goodwill (W.N 2) Fixed Assets 6% investments (Non- trade) Stock Debtors Cash and Bank Balances

3,19,200 12,00,000

3,00,000 6,12,000 5,10,000

90,000

1,21,200 3,00,000

---- 4,26,000 1,80,000

30,000

30,31,200 10,57,200

Less: Creditors 3,00,000 1,50,000

Net Assets 27,31,200 9,07,200

No. of Equity Shares 1,50,000 60,000

Intrinsic value of a share `18.208 `15.12

No of shares to be issued by Green Ltd. to

Red Ltd. 1,50,000 X 18.208/10 2,73,120 shares

Blue Ltd. 60,000 X 15.12/10 90,720 shares

In total 2,73,120+ 90,720 i.e. 3,63,840 shares will be issued by Green Ltd. Ratio of exchange of shares will be as follows: A. Holders of 1,50,000 equity shares of Red Ltd. will get 2,73,120 shares in Green Ltd. B. Similarly, holders of 60,000 equity shares of Blue Ltd. will get 90,720 shares in Green Ltd. (ii) Opening balance sheet of Green Ltd.


Share Capital : 3,63,840 Equity shares of ` 10 each (Issued for consideration other than cash, pursuant to scheme of amalgamation) Current Liabilities: Creditors

36,38,400

4,50,000

Fixed Assets: Goodwill (W.N 2) (3,19,200+ 1,21,200) Other fixed Assets (12,00,000+ 3,00,000) Investments in 6% Tax free G.P Notes Current Assets: Stock (6,12,000+4,26,000) Debtors (5,10,000+ 1,80,000) Cash and Bank balance (90,000+30,000)

4,40,400

15,00,000 3,00,000

10,38,000

6,90,000 1,20,000

40,88,400 40,88,400



Working Notes: 1. Calculation of Closing trading capital employed on the basis of net assets

Red Ltd. (`) Blue Ltd. (`)

Fixed Assets Stock Debtors Cash and Bank Balance

12,00,000 6,12,000 5,10,000

90,000

3,00,000 4,26,000 1,80,000

30,000

24,12,000 9,36,000

Less: Creditors 3,00,000 1,50,000

Net Assets 21,12,000 7,86,000

2. Calculation of value of Goodwill A. Average trading profit


2011-12 2012-13 2013-14

3,90,000 3,75,000 4,50,000

1,35,000 1,20,000 1,68,000

Profit after tax 12,15,000 4,23,000

Profit before tax Add: Under valuation of closing stock

20,25,000 12,000

7,05,000 36,000

20,37,000 7,41,000

Average of 3 years’ profit before tax 6,79,000 2,47,000

Less: Income from non-trade investments (3,00,000 X 6%)

18,000 --

Average profit before tax Less: 40% tax

6,61,000 2,64,400

2,47,000 98,800

Average profit after tax 3,96,600 1,48,200

(B) Super Profits


Average trading profit Less: Normal Profit Red Ltd. `21,12,000 X 15% Blue Ltd. ` 7,86,000 X 15%

3,96,600

3,16,800 --

1,48,200

-- 1,17,900

79,800 30,300

(C)


Value of Goodwill at 4 years’ purchase of super profits 3,19,200 1,21,200

14. The following are the Balance Sheet of Anurag Ltd. and Farhan Ltd. as at 31.12.2014

Anurag Ltd.

Liabilities `’000 Assets `’000

Share Capital 3,00,000 Equity shares of ` 10 each 10,000 Preference shares of `10 each General Reserves Secured Loans ( secured against pledge of stocks) Unsecured Loans Current Liabilities

3,000 1,000

400 16,000

8,600 13,000

Fixed Assets Stock ( pledge with secured loan creditors) Other Current Assets Profit and Loss Account

3,400 18,400

3,600 16,600



42,000 42,000

Farhan Ltd.

Liabilities `’000 Assets `’000

Share Capital (1,00,000 Equity shares of ` 10 each) General Reserves Secured Loans Current Liabilities

1,000 2,800 8,000 4,600

Fixed Assets Current Assets

6,800 9,600

16,400 16,400

Both the companies go into liquidation and Oscar Ltd. is formed to take over their businesses. The following information is given- (a) All current Assets of two companies, except pledged stock are taken over by Oscar Ltd. The realizable value of all Current Assets are 80% of book values in case of Anurag Ltd. and 70% for Farhan Ltd. , Fixed assets are taken over at book value . (b) The breakup of Current liabilities-

Particulars Anurag Ltd. `

Farhan Ltd. `

Statutory Liabilities ( including `22 lakhs in case of Anurag Ltd. , incase of claim not having been admitted shown as contingent liability) Liabilities to employees

72,00,000

30,00,000

10,00,000

18,00,000

Note: Balance of Current liability is miscellaneous creditors. (c) Secured Loan include `16,00,000 accrued interest in case of Farhan Ltd. (d) 2,00,000 equity shares of `10 each are allotted by Oscar Ltd. , at par against cash payment of entire face value to the shareholders of Anurag Ltd. and Farhan Ltd. in the ratio of shares held by them in Anurag Ltd. and Farhan Ltd. (e) Preference shareholders are issued Equity shares worth `2,00,000 in lieu of present holding. (f) Secured Loan Creditors agree to continue the balance amount of their loans to Oscar Ltd. , after adjusting value of pledged security in case of Anurag Ltd. and after waiving 50% of interest due in the case of Farhan Ltd. (g) Unsecured Loans are taken over by Oscar Ltd. at 25% of loan amount. (h) Employees are issued fully paid Equity Shares in Oscar Ltd. in full settlement of their dues. (i) Statutory liabilities are taken over by Oscar Ltd. at full values and miscellaneous creditors are taken over at 80% of the book value. Compute the purchase consideration Compute the account of Goodwill/Capital reserve on takenover of businesses. 14. Solution.

A. Computation of Purchase Consideration (`’000) Note: In the absence of method for computing Purchase Consideration, Net Assets Method is used.

Anurag Ltd. Farhan Ltd.

Fixed Assets (at Book Value) Current Assets

3,400 2,880

(3,600X80%)

6,800 6,720

(9,600 X 70%)

Total of Assets Taken Over 6,280 13,520

Current Liabilities: Liability to Employees Statutory Liabilities (Recognized) Statutory Liabilities (Disputed) Miscellaneous Creditors (@ 80%)

3,000 5,000 2,200 4,000

1,800 1,000

-- 1,440



Secured Loan Unsecured Loan

[(13,000 – 3,000-5,000) X 80%] 1,280

(16,000 – 80% of stick 18,400) 2,150

[(4,600-1,000-1,800)X80%] 7,200

(8,000-Acc. Int. 1,600 X 50%) --

Total of Liabilities Taken over 17,630 11,440

Net Assets Taken Over (11,350) 2,080

Equity Shareholders of Farhan Ltd. will be allotted Equity Share Capital in Oscar Ltd. worth `2,080 (issued at par). Equity Shareholders of Anurag will not be allotted any Equity Capital in Oscar Ltd. for transfer of assets and liabilities. Shares issued for cash cannot be considered as Purchase Consideration, as it is not for purchase of assets of the Companies, but only against receipt of cash.

B. Statement of Purchase Consideration

Mode Description Amount

Anurag Ltd. Equity Shareholders Preference Shareholders

Net Assets taken over is negative . Therefore , no equity is allotted. 20,000 Equity Shares of Oscar Ltd. of ` 10each, issued at par as fully paid up.

NIL

`2,00,000

Purchase Consideration for Anurag Ltd. `2,00,000

Farahn Ltd. Equity Share holders (= to Net Assets Takenover)

2,08,000 Equity Shares of Oscar Ltd. of ` 10 each , issued at par as fully paid up.

`20,80.000

C. Computation of Goodwill/ Capital Reserve on Takenover (`’000)

Anurag Ltd. Farhan Ltd.

Purchase Consideration Less: Net Assets Taken over (Add: Net Liabilities)

200 11,350

2,080 (2,080)

Goodwill/ Capital Reserve 11,550 NIL

15. Techno Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making constant profits while division Mobiles has been invariably suffering losses.

On 31st March 2014 the division-wise draft Balance Sheet was: (` in crores)

Laptops Mobiles Total

Fixed assets cost Depreciation Net Assets (A)

Current assets:

Less: Current liabilities

(B)

Total (A+B)

Financed by: Loan funds Capital: Equity `10 each Surplus

250 (225)

500 (400)

750 (625)

25 100 125

200 (25)

500 (400)

700 (425)

175 100 275

200 200 400

-

25 175

300

- (100)

300

25 75

200 200 400

Division Mobiles along with its assets and liabilities was sold for `50 crores to Turnaround Ltd. a new company,

who allotted 1 crore equity shares of `10 each at a premium of `40 per share to the members of Techno Ltd. in

full settlement of the consideration, in proportion to their shareholding in the company.

Assuming that there are no other transactions, you are asked to:

(i) Pass journal entries in the books of Techno Ltd.



(ii) Prepare the Balance Sheet of Techno Ltd. after the entries in (i).

(iii) Prepare the Balance Sheet of Turnaround Ltd.

Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer should be as per Revised Schedule VI.

15. Solution.

Journal of Techno Ltd. (` in crores)

Dr. `

Cr. `

(1) (2)

Turnaround Ltd. Dr. Loan Funds Dr. Current Liabilities Dr. Provision for Depreciation Dr. To Fixed Assets To Current Assets To Capital Reserve (Being division Mobiles along with its assets and liabilities sold to Turnaround Ltd. for ` 50 crores)

50 300

400 400

50

500 500 150

50

Capital Reserve Dr. To Turnaround Ltd. (Being allotment of 1 crore equity shares of `10 each at a premium of `40 per share to the members of Techno Ltd. in full settlement of the consideration)

Techno Ltd,

Balance Sheet after reconstruction

Note No.

I. II.

Equity and liabilities (1) Shareholders' funds

(a) Share Capital (b) Reserves and surplus

(2) Current Liabilities Total Assets (1) Non-current assets

(a) Fixed assets (2)Current assets Total

1

25 175

200 25

225

25 200

225

Notes to Accounts

1. Reserves and Surplus Add: Capital Reserve on reconstruction

(` in crores) 75

100

175

Note to Accounts: Consequent on transfer of Division Mobiles to newly incorporated company Turnaround Ltd.,

the members of the company have been allotted 1 crore equity shares of `10 each at a premium of `40 per share

of Turnaround Ltd., in full settlement of the consideration in proportion to their shareholding in the company.



Balance Sheet of Turnaround Ltd.

Note No.

1. II.

Equity and liabilities (1) Shareholders' funds (a) Share Capital (b) Reserves and surplus: Securities Premium (2) Non-current liabilities Long term borrowings (3) Current liabilities Total Assets (1) Non-current assets Fixed assets (i) Tangible assets (ii) Intangible assets

(2) Current assets Total

1

2

10

40

50

300 400

100 150

750

250 500 750

Notes to Accounts

(` in crores)

1. 2.

Share Capital: Issued and Paid-up capital 1 crore Equity shares of ` 10 each fully paid up (All the above shares have been issued for consideration other than cash, to the members of Techno Ltd. on take over of Division Mobiles from Techno Ltd.) Intangibles Assets: Goodwill (WN 1)

10

150

Working Note

1. Calculation of Goodwill/Capital Reserve for Turnaround Ltd.

Assets taken over

Non Current Assets Current Assets Total Assets(A) Loan Funds Current Liabilities Total Liabilities (B) Net Assets C= (A-B) Purchase Consideration (given) D Goodwill (D-C)

100 500

600 300 400

700 (100)

50 150

16. The summarized Balance sheets of Aman Ltd. and its subsidiary Ayan Ltd. as at 31.3.2014 were as follows :

Liabilities Aman Ltd. Ayan Ltd. Assets Aman Ltd. Ayan Ltd.

Share capital 50,00,000 10,00,000 Fixed assets 60,00,000 18,00,000



(Share of `10 each)

General reserves 50,00,000 20,00,000 Investment in Ayan Ltd. (60,000 shares)

6,00,000 ---

Profit and Loss account

20,00,000 15,00,000 Sundry debtors 35,00,000 5,00,000

Secured loan 20,00,000 2,50,000 Inventories 30,00,000 25,00,000

Current liabilities 30,00,000 2,50,000 Cash and bank 39,00,000 2,00,000

1,70,00,000 50,00,000 1,70,00,000 50,00,000

Aman Ltd. holds 60% of the paid-up capital of Ayan Ltd. and the balance is held by a foreign company. A memorandum of understanding has been entered into with the foreign company by Aman Ltd. to the following effect: (i) The shares held by the foreign company will be sold to Aman Ltd. at a price per share to be calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean 50% of the average of pre-tax profits for the last 3 years, which were `12 lakhs, 18 lakhs and 24 lakhs respectively. (Average tax rate was 40%). (ii) The actual cost of shares to the foreign company was `4,40,000 only. Gains accruing to the foreign company are taxable at 20%. The tax payable will be deducted from the sale proceeds and paid to government by Aman Ltd. 50% of the consideration (after payment of tax) will be remitted to the foreign company by Aman Ltd. and also any cash for fractional shares allotted. (iii) For the balance of consideration, Aman Ltd. would issue its shares at their intrinsic value. It was also decided that Aman Ltd. would absorb Ayan Ltd. Simultaneously by writing down the Fixed assets of Ayan Ltd. by 10%. The Balance Sheet figures included a sum of `1,00,000 due by Ayan Ltd. to Aman Ltd. and stock of Aman Ltd. included stock of `1,50,000 purchased from Ayan Ltd., who sold them at cost plus 20%. The entire arrangement was approved and put through by all concern effective from 1.4.2012. You are required to indicate how the above arrangements will be recorded in the books of Aman Ltd. and also prepare a Balance Sheet after absorption of Ayan Ltd. Workings should form part of your answer. Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer should be as per Revised Schedule VI. 16.Solution.

Name of the Company: Aman Ltd.


Ref No. Particulars

Note No. As at 1st April, 2014

As at 1st April, 2013

` `



(d) (a) Share capital 1 53,34,660

(e) (b) Reserves and surplus 2 89,64,320

(f) (c) Money received against share warrants





(e) (a) Long-term borrowings 3 22,50,000

(f) (b) Deferred tax liabilities (Net)

(g) (c) Other Long term liabilities

(h) (d) Long-term provisions


(e) (a) Short-term borrowings

(f) (b) Trade payables

(g) (c) Other current liabilities 4 33,00,000

(h) (d) Short-term provisions

Total 1,96,98,980

II. Assets


(a) Fixed assets


(b) Intangible assets

(c) Capital work-in-progress

(d) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (Net)

(d) Long-term loans and advances

(e) Other non-current assets

2 Current assets

(g) (a) Current investments

(h) (b) Inventories 6 54,75,000

(i) (c) Trade receivables 7 39,00,000

(j) (d) Cash and cash equivalents 8 27,03,980

(k) (e) Short-term loans and advances

(l) (f) Other current assets

Total 1,96,98,980



(`)

Note 1. Share Capital As at 1st April, 2014 As at 1st April, 2013

Authorised, Issued, Subscribed and paid up:- 5,33,466 Equity Shares of ` 10 (of which 33,466 shares of ` 10 each issued for consideration other than cash)

53,34,660

Total 53,34,660


FOR EQUITY SHARE :- As at 1st April, 2014 As at 1st April, 2013

Nos Amount (`) Nos Amount (`)

Opening Balance as on 01.04.13 5,00,000 50,00,000 NIL NIL

Add: Fresh Issue (Include Bonus shares, Right shares, split shares, shares issued other than cash)

33,466

3,34,660

NIL NIL

5,33,466 53,34,660 NIL NIL


5,33,466 53,34,660 NIL NIL

Note 2. Reserves and Surplus As at 1st April, 2014 As at 1st April, 2013


Capital Reserve 13,20,000

Profit and Loss A/c (20,00,000 - 25,000) 19,75,000

Securities Premium (33,466 × 20) 6,69,320

Total 89,64,320

Note 3. Long-term borrowings As at 1st April, 2014 As at 1st April, 2013

Secured Loans (20,00,000 +2,50,000) 22,50,000

22,50,000

Note 4. Other Current Liabilities As at 1st April, 2014 As at 1st April, 2013

Current Liabilities (32,50,000 – Mutual Debt. 1,00,000) 31,50,000

Total 31,50,000

Note 5. Tangible assets As at 1st April, 2014 As at 1st April, 2013

Fixed Assets (78,00,000 – 1,80,000) 76,20,000



Total 76,20,000

Note 6. Inventories As at 1st April, 2014 As at 1st April, 2013

Inventories (30,00,000 + 25,00,000 – Unrealised Profit 25,000) 54,75,000

Total 54,75,000

Note 7. Trade receivables As at 1st April, 2014 As at 1st April, 2013

Sundry Debtors ( 40,00,000 – Mutual debts 1,00,000) 39,00,000

Total 39,00,000

Note 8. Cash and cash equivalent As at 1st April, 2014 As at 1st April, 2013

Cash at Bank 27,03,980

Total 27,03,980

Working Notes:

i. Average of Pre Tax Profit =3

241812 =`18Lakhs

Yield = 18 × 100

50=`9 lakhs

ii. Price per share of Ayan Ltd:-

Capitaised value of yield of Ayan Ltd. = 6010015

lakhs 9 lakhs.

No. of shares = 1,00,000

Price per share =60 lakhs

60 per share1 lakhs

`

iii. Purchase consideration for 40% of share capital of Ayan Ltd.

= 1,00,000 x 60 x100

40 = `24,00,000

iv. Calculation of intrinsic value of shares of Aman Ltd.

Total Assets excluding Investments in Ayan Ltd. Value of Investment 60,000 ×60

1,64,00,000 36,00,000

2,00,00,000

Less: Outside Liabilities: Secured Loan 20,00,000 Current Liabilities 30,00,000

50,00,000

Net Assets 1,50,00,000

Intrinsic value per share = shares of No

assetNet = share 30.

5,00,000

,000Rs.1,50,00perRs

v. Discharge of purchase consideration by Aman Ltd.

Equity share capital `

Cash `

Total `



100

20)40.424( tax ofPayment

---- 3,92,000 3,92,000

Issue of shares to foreign company

shares 666.466,33

30

000,04,10 Ltd.Aman by issued shares of No.

lakhs04.10)92.324( of %50

30 33,466 capital shares of Value

10,03980

----

10,03,980

Cash payment

Lakhs04.10)92.324( of %50

----

10,04,000

10,04,000

Cash for fractional shares

306666.0

---- 20

20

Total 10,03,980 13,96,020 24,00,000

vi. Calculation for Goodwill/Capital Reserve to Aman Ltd.

`

Total of Assets as per Balance Sheet of Ayan Ltd. Less: 10% Reduction in the value of Fixed Assets

)000,00,18100

10(

50,00,000 1,80,000

Less: Secured Loan `2,50,000 Current Liabilities `2,50,000

48,20,000

5,00,000

Net Assets Less: Purchase consideration (outside shareholders)

43,20,000 24,00,000

Less: Investment in Ayan Ltd. as per Balance Sheet of Aman Ltd.

19,20,000 6,00,000

13,20,000

vii. Cash and Bank Balance of Aman Ltd. after acquisition of shares

`

Opening Balance (Aman Ltd.) Cash and Bank Balance of Ayan Ltd.

39,00,000 2,00,000

Less: Remittance to the foreign company

41,00,000 10,04,020

Less: T.D.S. paid to Government 3,92,000

30,95,980 3,92,000

27,03,980

viii. Unrealised profit included in stock of Aman Ltd.20

1,50,000 25,000120

`

17. Given below summarized balance sheets of X Limited and Y Limited as at 31.3.2014.



X Ltd. Y Ltd. ` in Lakhs ` in Lakhs

Sources of Funds

Shareholders’ funds 600 400

Equity Shares of ` 100 each

Reserves and surplus

General Reserve 300 200

Profit and Loss A/c 100 100

Loan Funds

Secured Loans (of less than 12 months) 300 300

Unsecured Loans(of less than 12 months) 200 200

1,500 1,200

Applications of Funds:

Fixed Assets

Gross block 1,000 900

Less: Depreciation (200) (250)

Net block 800 650

Investments - in 2.4 lakhs shares of Y Ltd. 300 –

Others – 200

Current assets, Loans and Advances

Less: Current liabilities 600 500

Net Current assets (200) (150)

400 350

1,500 1,200

Note: Secured and unsecured loans are assumed to be of more than 12 months hence treated as long term

borrowing . (ignoring interest)

X Ltd. agreed to take over all the assets and liabilities of Y Ltd. at book value and discharge the claims of

minority shareholders by issuing its one share for every two shares held. Minorities claims are to be discharged

on the basis of intrinsic value per share. For computing intrinsic value per share net Fixed assets of Y Ltd are to

be valued at ` 850 Lakhs. Prepare post merger Balance Sheet of X Ltd. Show all your workings.


17. Solution.

Part I : Calculation of Purchase Consideration

WN # 1 : Computation of Intrinsic Value

(` in Lakhs)

X Ltd Y Ltd

Fixed assets 800 850



Investments: In Y Ltd. (2.4 x 225) 540 –

Other investments – 200

Current assets, Loans and Advances 600 500

Less: Current liabilities (200) (150)

Less: Unsecured Loans (200) (200)

Less: Secured Loans (300) (300)

Net Assets 1240 900

Intrinsic Value (Net Assets ÷ No. of shares outstanding) 1240/6 900/4

= 206.67 = 225

WN # 2 : Purchase Consideration

Particulars

Total number of shares outstanding (lakhs) 4,00,000

Less: Shares held by X Ltd. (lakhs) 2,40,000

Shares held by Outsiders (lakhs) 1,60,000

Exchange Ratio (lakhs) 1:2

No. of shares to be issued (lakhs) 80,000

Intrinsic Value Per share 206.67

Purchase Consideration (80,000 × ` 206.67) `1,65,33,600

Part II - In the Books of Purchasing Co. X Ltd

• Nature of Amalgamation : Merger

• Method of Accounting : Pooling of interest

(` in amount)

Particulars Debit Credit

1. For Purchase Consideration Due:

Business Purchase A/c Dr. 1,65,33,600

To Liquidator of Y Ltd A/c 1,65,33,600

2. For Assets and Liabilities Takeover:

a. Aggregate Consideration

i. Already Paid 3,00,00,000

ii. Balance Payable 1,65,33,600

4,65,33,600

b. Less: Paid-up Capital of Vendor Co. (4,00,00,000)

c. Excess

(The above excess to be adjusted against:

*General Reserves of Y Ltd. 65,33,600

d. Balance of General Reserves of Y Ltd. to be

incorporated (2,00,00,000 – 65,33,600) 1,34,66,400

Fixed Assets A/c Dr. 9,00,00,000



Investments A/c Dr. 2,00,00,000

Current Assets A/c Dr. 5,00,00,000

To Provision for depreciation A/c 2,50,00,000

To Current liabilities and Provisions A/c 1,50,00,000

To Secured Loans A/c 3,00,00,000

To Unsecured Loans A/c 2,00,00,000

To Business Purchase A/c 1,65,33,600

To Investments in Y Ltd A/c 3,00,00,000

To General Reserve A/c 1,34,66,400

To Profit and Loss A/c 1,00,00,000

3. For Discharge of Purchase Consideration

Liquidator of Y Ltd A/c Dr. 1,65,33,600

To Equity Share Capital A/c 80,00,000

To Securities Premium A/c 85,33,600

Name of the Company: X Ltd.


Ref No.

Particulars Note No.

As at 31st March, 2014


(`in Lakhs) (`in Lakhs)



(a) Share capital 1 6,80,00,000

(b) Reserves and surplus 2 7,20,00,000

( c) Money received against share warrants



(a) Long-term borrowings 3 10,00,00,000

(b)Deferred tax liabilities (Net)

(c ) Other Long term liabilities




(b) Trade payables



(c )Other current liabilities 4 3,50,00,000


Total (1+2+3+4) 27,50,00,000

II. Assets


(a) Fixed assets

(i) Tangible assets 5 14,50,00,000

(ii) Intangible assets



(b) Non-current investments 6 2,00,00,000

( c)Deferred tax assets (Net)



2 Current assets

(a)Current investments

(b) Inventories

(c ) Trade receivables



(f) Other current assets 7 11,00,00,000

Total (1+2) 27,50,00,000

Notes on accounts

(`in Lakhs)

Note 1. Share Capital As at 31st

March, 2014 As at 31st

March, 2013

A. Authorised Capital -

B. Issued, Subscribed and paid up Capital of `100 each[out of which 30,000 shares were issued for consideration other than for cash)

6,80,00,000

Total 6,80,00,000




FOR EQUITY SHARE :- As at 31st March, 2014 As at 31st March, 2013

Nos Amount (`) Nos Amount (`)

Opening Balance as on 01.04.13 6 6,00,00,000 NIL NIL

Add: Fresh Issue ( Incld Bonus shares , Right shares, split shares, shares issued other than cash)

0.80

80,00,000

NIL NIL

6.80 6,80,00,000 NIL NIL


6.80 6,80,00,000 NIL NIL

Note 2. Reserves and Surplus As at 31st March, 2014 As at 31st March, 2013

General Reserve (3,00,00,000 + 1,34,66,400) 4,34,66,400

Securities Premium 85,33,600

Profit and Loss A/c (1,00,00,000 + 1,00,00,000) 2,00,00,000

Total 7,20,00,000

Note 3. Long Term Borrowings As at 31st March, 2014 As at 31st March, 2013

Secured (3,00,00,000 + 3,00,00,000) 6,00,00,000

Unsecured (2,00,00,000 + 2,00,00,000) 4,00,00,000

Total 10,00,00,000

Note 4. Other Current Liabilities As at 31st March, 2014 As at 31st March, 2013

Current Liabilities (2,00,00,000 + 1,50,00,000) 3,50,00,000

Total 3,50,00,000

Note 5. Tangible assets As at 31st March, 2014 As at 31st March, 2013

Fixed Assets 19,00,00,000

Less Accumaleted Depreciation 4,50,00,000

Total 14,50,00,000

Note 6. Non Current Investment As at 31st March, 2014 As at 31st March, 2013

Investment 2,00,00,000

Total 2,00,00,000



Note 7. Other Current assets As at 31st March, 2014 As at 31st March, 2013

Current assets 11,00,00,000

Total 11,00,00,000

18. The draft consolidated data of A Ltd., and its 100% subsidiary B Ltd. and also information of C Ltd. relating to

the year end 31st

March, 2014 is given below:

DRAFT BALANCE SHEET (` in thousand)

CBS of A Ltd. and its 100% Subsidiary B Ltd.

C Ltd.

Issued ordinary share capital Reserves Debentures Current liabilities Total Fixed assets (net) Investment in C Ltd. at cost Current assets Total

2,000 3,450 2,000 4,550

1,000 2,000 1,500 2,500

12,000 7,000

6,500 2,000 3,500

4,000 -

3,000

12,000 7,000

PROFIT AND LOSS ACCOUNT (DRAFT)

A Ltd and its 100% Subsidiary B Ltd.

C Ltd.

Sales Expenses Trading profit before tax Dividend from Uncertain Ltd. Taxation Profit after tax Opening Balance Dividends paid Retained Profit

2,000 (900)

1,200 (500)

1,100 100

(600)

700 —

(200)

600 3,150 (300)

500 1,100 (200)

3,450 1,400

A Ltd. acquired 50% of the ordinary share capital of C Ltd. on 1st

April, 2013 for `2,000 thousands when its

reserves were `1,700 thousands and sold this holding on 3rd

April, 2014 for `2,050 thousands.

You are required to prepare the 'Group' Profit and Loss account (draft) and Balance Sheet (draft) on four bases as follows:

When C Ltd. is treated as a subsidiary

When C Ltd. is treated as an associated company

When C Ltd. is treated as an investment

When C Ltd. is treated as a Joint Venture.

18.Solution:

When C Ltd. is treated as a subsidiary or an Investment company

Particulars Subsidiary Investment



a. Accounting Standard Applicable

21 13

b. Method Full Consolidation Cost method

c. Date of Acquisition 1st

April 2011 1st

April 2011

d. Shareholding A Ltd -50% Minority Int. - 50%

Not applicable

e. Analysis of reserves 1) Opening balance 1,700 thousands pre- acquisition

2) Current year retained profit 300 thousands post-acquisition

Not applicable

f. Apportionment of Profits 1) Pre-acquisition 2) Post-acquisition

1) A Ltd. - 850 thousand 2) Minority – 850 thousands 1)A Ltd.-150 thousands 2) Minority - 150 thousands

Not applicable

g. Outsider's interest Minority Interest 1) Share capital - 500 thousands 2) Pre-acquisition - 850 thousands 3) Post acquisition - 150 thousands Total 1500 thousands

h. Goodwill/Capital Reserve 1) Cost of Investment -2,000. thousands 2) Share of Net Assets on the date of Investment - Share Capital 500 thousands - Capital Profits 850 thousands 1350 thousands 3) Goodwill 650 thousands

Not applicable

I. Inter Company Transactions 1) Inter Company Owings 2) Unrealised Profits

Eliminate in full Eliminate in full

Not applicable

J. Reserves for CBS * Not applicable

k. Carrying amount of Investment in CBS

Nil 2000 thousand

When C Ltd. treated as an associated company or as a Joint Venture

Particulars Associate Joint venture

a. Accounting Standard Applicable

23 27

b. Method Equity method Proportionate consolidation

c. Date of Acquisition 1st

April 2013 1st

April 2013

d. Shareholding Extent of investment 50% Extent of financial interest 50%

e. Analysis of reserves 1) Opening balance 1,700 thousand pre-acquisition

2) Current year retained profit 300 thousands post acquisition

1) Opening balance 1,700 thousand pre-acquisition

2) Current year retained profit 300 thousands post acquisition



f. Apportionment of Profits 1) Pre-acquisition 2) Post-acquisition

1) A Ltd. – 850 thousand (investing Co.

Interest) 2) A Ltd. – 150 thousands

1) A Ltd. – 850 thousand

(investing Co. Interest) 2) A Ltd. – 150 thousands.

g. Outsider's interest Not applicable Not applicable

h. Goodwill/Capital Reserve 1) Cost investment 2,000 thousands 2) Share of net assets on the date of

investment -share capital 500 thousands -capital profits 850 thouisands Total 1,350 thousands

- Goodwill 650 thousands

1) Cost investment 2000 thousands

2) Share of net assets on the date of investment

-share capital 500 thousands -capital profits 850 thouisands

Total 1,350 thousands

- Goodwill 650 thousands

I. Inter Company Transactions 1) Inter Company Owings 2) Unrealised Profits

Not applicable Eliminate to the extent of investing co’s interest

Eliminate to the extent of venturer’s interest

J. Reserves for CBS * *

k. Carrying amount of Investment in CBS

a) Amount invested i) Share of

Net Assets 1,350 thousands ii) Goodwill - 650 thousands

2000 thousands b) Add: Share of Post Acquisition profits

250 thousands c) Less: Dividend

Received 100 thousands Total 2150 thousands

Nil

* Reserves for CBS

Draft Consolidate Profit and Loss A/c

as at 31.03.2014

` in thousands

Particulars Subsidiary Investment Associate Joint Venture

Sales Expenses Dividend PBT Tax

3,200 (1,400)

-

2,000 (900)

100

2,000 (900)

-

2,600 (1,150)

-

1,800 (800)

1,200 (600)

1,100 (600)

1,450 (700)



PAT Share of profits from Associate Opening Balance B/d Dividend Paid Share of Minority Interest Balance carried forward to Balance Sheet

1,000 -

3,150 (300) (250)

600 -

3,150 (300)

-

500 250

3,150 (300)

-

750 -

3,150 (300)

-

3,600

3,450

3,600

3,600

Draft Consolidated Balance Sheet As at 31.03.2014 ` in thousands

If Subsidiary If Investment If Associate If Joint Venture

Equity and Liabilities Share Capital Reserves Debentures Current Liabilities Minority Interest Total Assets Non-current assets Fixed Assets Tangible Assets Intangible Assets Investments Current Assets Total

2,000 3,600 3,500 7,050 1,500

2,000 3,450 2,000 4,550

-

2,000 3,600 2,000 4,550

-

2,000 3,600 2,750 5,800

-

17,650 12,000 12,150 14,150

10,500 650

-

6,500

6,500 -

2,000

3,500

6,500 -

2,150 (Goodwill - ` 650 thousands)

3,500

8,500 650

-

5,000

17,650 12,000 12,150 14,150

19. The summarized balance sheets of Good Ltd. and Luck Ltd as at 31.12.2014 are as follows-

Liabilities Good

Ltd.

`

Luck

Ltd.

`

Assets Good

Ltd.

`

Luck

Ltd.

`

Equity Share Capital (`10)

Reserves

Profit & Loss Account – as at

01.01.2012

Add: Profit for the year

Add: Dividends from Tharini Ltd

Less: Dividends paid

Creditors

17,50,000

2,00,000

3,00,000

80,000

40,000

-

3,00,000

5,00,000

50,000

1,00,000

80,000

-

(50,000)

2,00,000

Fixed assets

Current Assets

Investments at cost:

30,000 Shares in Luck Ltd

18,00,000

5,20,000

3,50,000

8,00,000

80,000

-

Total 26,70,000 8,80,000 Total 26,70,000 8,80,000



Good Ltd acquired 40,000 shares in Luck Ltd at `20 each on 01.01.2014 and sold 10,000 of them at the same

price on 30.09.2014 sale at cum- dividend price. An interim dividend of 10% was paid by Luck Ltd on 01.07.2014.

Prepare the consolidated Balance Sheet as at 31.12.2014.


19. Solution.

1. Basic Information

Company Status Dates Holding Status

Holding company = Good Ltd. Subsidiary = Luck Ltd.

Acquisition: 01.01.14 Consolidation: 31.12.14

Holding Co: = 60% Minority Interest: = 40%

2. Analysis of Reserves and surplus of Luck Ltd

(a) General Reserve

Balance as on 31.12.2014 `50,000

Balance on 01.01.2014 (date of acquisition) Transfer during 2014 (upto consolidation)

`50,000 (balancing figure) ` NIL

(Capital Profit) (Revenue Reserve)

(b) Profit and Loss Account

Balance as on 31.12.2014 `1,30,000

Balance on 01.01.2013 (date of acquisition) Profit for 2014 (upto consolidation) 80,000

`1,00,000 Less: Interim Dividend 50,000

(Capital Profit) Revenue Profit 30,000

1. Computation of Cost of Control & Minority Interest

Particulars Total Minority

Interest

Pre-Acquisition Post Acquisition

Luck Ltd (Holding 60%, minority 40%)

Equity Capital

General Reserves

Profit and Loss A/c

Gen. Res. P&L A/c

5,00,000

50,000

1,30,000

2,00,000

20,000

52,000

3,00,000

30,000

60,000

18,000

Minority interest 2,72,000

Total [Cr.]

Cost of Investment [Dr.] (Note 1)

Parent’s Balance (Note 1)

3,90,000

(3,50,000)

2,00,000

4,20,000

For consolidated balance sheet (40,000)

(Capital Reserve)

2,00,000 4,38,000



Note: adjustment for dividend is required since the shares are sold on cum – dividend basis i.e. including dividend.

The dividend when declared will be received by the buyer of the shares.

Name of the Company: Good Ltd. And its subsidiary Luck Ltd.


Ref No.


As at 31.12.14

As at 31.12.13

(`) (`)

I EQUITY AND LIABILITIES

1 Shareholders’ fund




2 Minority Interest (W.N) 2,72,000



(a) Long-term borrowings


(c )Other Long term liabilities




(b) Trade payables

(c )Other current liabilities 3 5,00,000


Total 32,00,000

II ASSETS


(a) Fixed assets




(ii) Intangible assets




(c)Deferred tax assets (Net)



2 Current assets


(b) Inventories

(c) Trade receivables



(f) Other current assets 5 4,00,000

Total 32,00,000

Notes on accounts (`)

1. Share capital 31.12.14 31.12.13

1,75,000 Equity Share Capital @10 each 17,50,000

Total 17,50,000

2. Reserve and Surplus 31.12.14 31.12.13


Profit & Loss A/c Capital Reserve 4,38,000

Total 6,78,000

3. Other current liabilities 31.12.14 31.12.13

Current Liabilities (30,000 + 20,000) 5,00,000



Total 5,00,000

4. Tangible Assets 31.12.14 31.12.13

Other Fixed Assets (18,00,000+8,00,000) 26,00,000

Total 26,00,000

5. Other Current Assets 31.12.14 31.12.13

Current Assets (5,20,000 + 80,000) 6,00,000

Total 6,00,000

20. From the following Balance Sheets of a group of companies and the other information provided, draw up the consolidated Balance Sheet as on 31.3.2014. Figures given are in ` Lakhs:

Balance Sheets as on 31.3.2014

Liabilities X `

Y `

Z `

Assets X `

Y `

Z `

Shares capital (in shares of ` 10 each)

1,650 1,100 550 Fixed Assets (Tangible)

715 825 550

Reserves 275 220 165 Cost of investment in Y Ltd.

990

Profit and Loss balance 330 275 220 Cost of investment in Z Ltd.

220

Bills payables 55 27.5 Cost of investment in Z Ltd.

440

Creditors 165 55 55 Stock 275 110 110

Y Ltd. balance 82.5 Debtors 385 55 110

Z Ltd. balance 275 Bills receivables 55 110

Z Ltd. balance 55

X Ltd. balance 165

Cash and bank balance

165 110 55

2,750 1,650 1,100 2,750 1,650 1,100

i. X Ltd. holds 8,80,000 shares and 1,65,000 shares respectively in Y Ltd. and Z Ltd.; Y Ltd. holds 3,30,000

shares in Z Ltd. These investments were made on 1.7.2013 on which date the provision was as follows: Y Ltd. Z Ltd. ` `

Reserves 110 55 Profit and loss account 165 88



ii. In December, 2013 Y Ltd. invoiced goods to X Ltd. for ` 220 lakhs at cost plus 25%. The closing stock of X Ltd. includes such goods valued at `27.5 lakhs.

iii. Z Ltd. sold to Y Ltd. an equipment costing `132 lakhs at a profit of 25% on selling price on 1.1.2014. Depreciation at 10% per annum was provided by Y Ltd. on this equipment.

iv. Bills payables of Z Ltd. represent acceptances given to Y Ltd. out of which Y Ltd. had discounted bills worth ` 16.5 lakhs.

v. Debtors of X Ltd. Include `16.5 lakhs being the amount due from Y Ltd. X Ltd. proposes dividend at 10%.

Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer should be as per Revised Schedule VI. 20.Sulution. Name of the Company: X Ltd. and its subsidiary Y Ltd. and Z Ltd. Consolidated Balance Sheet as at 31st March,2014

Ref No.




` `

A EQUITY AND LIABILITIES


(a) Share capital 1 1,650.00 -

(b) Reserves and surplus 2 835.45 -

(c)Money received against share warrants - -

2,485.45 -

2 Minority Interest 436.15 -


(a) Long-term borrowings (10% debentures) - -

(b) Deferred tax liabilities (net) - -

(c) Other long-term liabilities - -

(d) Long-term provisions - -

-

4 Current liabilities

(a) Short-term borrowings - -

(b) Trade payables 3 247.50 -

(c) Other current liabilities 4 71.50 -

(d) Short-term provisions 5 165.00 -

456.50 -

TOTAL (1+2+3+4) 3,405.60 -

B ASSETS



Ref No.




` `


(a) Fixed assets

(i) Tangible assets 6 2,047.10 -

(ii) Intangible assets - -

(iii) Capital work-in-progress - -

(iv) Intangible assets under development - -

(v) Fixed assets held for sale - -

(b) Non-current investments -

(c) Deferred tax assets (net) - -

(d) Long-term loans and advances - -

(e) Other non-current assets - -

2,047.10 -

2 Current assets

(a) Current investments - -

(b) Inventories 7 489.50 -

(c) Trade receivables 8 522.50 -

(d) Cash and cash equivalents 9 192.50 -

(e) Short-term loans and advances - -

(f) Other current assets 10 154.00 -

1,496 -

TOTAL (1+2) 3,405.60 -

Annexure

Note 1. Share Capital



Share Capital in Equity Shares 1,650.00

Total 1,650.00

Note 2. Reserves and Surplus



Capital reserves 73.70

Other Reserves 448.80

Profit & Loss A/c 312.95

Total 835.45

Note 3. Other Current Liabilities





X Ltd. 165.00

Y Ltd. 55.00

Z Ltd. 55.00

275.00

Less: Mutual Indebtedness 27.50

Total 247.50

Note 4. Other Current Liabilities



X Ltd. 55.00

Y Ltd. 27.50

82.50


71.50

Note 5. Short Term Provisions



Proposed Dividend 165.00

Total 165.00

Note 6. Tangible assets



X Ltd. 715.00

Y Ltd. 825.00

Z Ltd. 550.00

2,090.00

Less: Unrealised Profit 42.90

Total 2,047.10

Note 7. Inventories



X Ltd. 275.00

Y Ltd. 110.00

Z Ltd. 110.00

495.00

Less: Unrealised Profit 5.50

Total 489.50

Note 8. Trade Receivables



X Ltd. 385.00

Y Ltd. 55.00

Z Ltd. 110.00

550.00


Total 522.50



Note 9. Cash and cash equivalents



Cash and Bank Balances 330.00

Current Account Balances [(275.00+82.50)-(55+165)] 137.50

Total 192.50

Note 10. Other current assets



Y Ltd. 55.00

Z Ltd. 110.00

165.00


Total 154.00

Working Notes: (` in lakhs)

(1) Analysis of Profits of Z Ltd. Capital Profit

Revenue Reserve

Revenue profit

Reserves on 1.7.2013 55.00

Profit and Loss A/c on 1.7.2013 88.00

Increase in Reserves 110.00

Increase in Profit _____ _____ 132.00

143.00 110.00 132.00

Less: Minority Interest (10%) 14.30 11.00 13.20

128.70 99.00 118.80

Share of X Ltd. 42.90 33.00 39.60

Share of Y Ltd. 85.80 66.00 79.20

(2) Analysis of Profits of Y Ltd.

Reserves on 1.7.2013 110.00

Profit and Loss A/c on 1.7.2013 165.00

Increase in Reserves 110.00

Increase in Profit _____ _____ 110.00

275.00 110.00 110.00

Share in Z Ltd. _____ 66.00 79.20

275.00 176.00 189.20

Less: Minority Interest (20%) 55.00 35.20 37.84

Share of X Ltd. 220.00 140.80 151.36

(3) Cost of Control

Investments in Y Ltd. 990.00

Investments in Z Ltd. 660.00

1,650.00

Less: Paid up value of investments

in Y Ltd. 880.00

in Z Ltd. 495.00 1,375.00

Capital Profit



in Y Ltd. 220.00

in Z Ltd. 128.70 348.70 1,723.70

Capital Reserve 73.70

(4) Minority Interest Y Ltd. Z Ltd.

Share Capital 220.00 55.00

Capital Profit 55.00 14.30

Revenue Reserves 35.20 11.00

Revenue Profits 37.84 13.20

348.04 93.50

Less: Unrealised profit on stock (20% of 5.5) 1.1

Unrealised profit on equipment (10% of 42.90) _____ 4.29

346.94 89.21

Total 436.15

(5) Unrealised Profit on equipment sale

Cost 132.00

Profit 44.00

Selling Price 176.00

Unrealised profit = 44 – 44

12

3

100

10 = 44.00 – 1.1 = 42.90

(6) Profit and Loss Account – X Ltd.

Balance 330.00

Less: Proposed Dividend 165.00

165.00

Share in Y Ltd. 151.36

Share in Z Ltd. 39.60

355.96

Less: Unrealised profit on equipment (90% of 42.90) 38.61

317.35

Less: Unrealised profit on stock

80%

12525

27.50 4.4

312.95

(7) Reserves – X Ltd.

X Ltd. 275.00

Share in Y Ltd. 140.80

Share in Z Ltd. 33.00

448.80

21. R Ltd. owns 80% of S and 40% of T and 40% of Q. T is jointly controlled entity and Q is an associate. Balance Sheet of four companies as on 31.03.2014 are:

Assets R Ltd. `

S Ltd. `

T Ltd. `

Q Ltd. `

Investment in S 1,200 - - -

Investment in T 1,800 - - -

Investment in Q 1,800 - - -



Fixed Assets 1,500 1,200 2,100 1,500

Current Assets 3,300 4,950 4,875 5,475

Total 7,800 6,150 6,975 6,975

Liabilities

Share capital `1 Equity Share 1,500 600 1,200 1,200

Retained Earnings 6,000 5,100 5,400 5,400

Creditors 300 450 375 375

Total 7,800 6,150 6,975 6,975

R Ltd. acquired shares in ‘S’ many years ago when ‘S’ retained earnings were ` 780 lakhs. R Ltd. acquired its shares in ‘T’ at the beginning of the year when ‘T” retained earnings were ` 600 lakhs. R Ltd. acquired its shares in ‘Q’ on 01.04.2013 when ‘Q’ retained earnings were ` 600 Lakhs. The balance of goodwill relating to ‘S’ had been written off three years ago. The value of goodwill in ‘T’ remains unchanged. Prepare the Consolidated Balance Sheet of R Ltd. as on 31.03.2014 as per AS 21, 23 and 27. Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer should be as per Revised Schedule VI. 21. Solution. Name of the Company: R Ltd. Consolidated Balance Sheet as at 31st March,2014

Ref No.


As at 31st

March, 2014


` `

A EQUITY AND LIABILITIES


(a) Share capital 1 1,500 -

(b) Reserves and surplus 2 13,200 -

(c)Money received against share warrants - -

14,700 -

2 Minority Interest 1,140 -


(a) Long-term borrowings (10% debentures) - -

(b) Deferred tax liabilities (net) - -

(c) Other long-term liabilities - -

(d) Long-term provisions - -

-

4 Current liabilities

(a) Short-term borrowings - -

(b) Trade payables 3 900 -



Ref No.


As at 31st

March, 2014


` `

(c) Other current liabilities - -

(d) Short-term provisions - -

900 -

TOTAL (1+2+3+4) 16,740 -

B ASSETS


(a) Fixed assets

(i) Tangible assets 4 3,540 -

(ii) Intangible assets 5 180 -

(iii) Capital work-in-progress - -

(iv) Intangible assets under development - -

(v) Fixed assets held for sale - -

(b) Non-current investments 6 2,820

(c) Deferred tax assets (net) - -

(d) Long-term loans and advances - -

(e) Other non-current assets - -

6,540 -

2 Current assets

(a) Current investments - -

(b) Inventories - -

(c) Trade receivables - -

(d) Cash and cash equivalents - -

(e) Short-term loans and advances - -

(f) Other current assets 7 10,200 -

10,200 -

TOTAL (1+2) 16,740 -

Annexure

Note 1. Share Capital



Share Capital in Equity Shares 1,500

Total 1,500



Note 2. Reserves and Surplus



Retained Earnings (W.N 2) 13,200

Total 13,200

Note 3. Trade Payables



Creditors [300+450+40% of 375] 900

Total 900

Note 4. Tangible assets



Fixed Assets [1,500 +1,200 + 840(2,100×40%)] 3,540

Total 3,540

Note 5. Intangible assets



Goodwill (W.N 1) 180

Total 180

Note 6. Noncurrent investments



Investment in Associates (W.N 4) 2,820

Total 2,820

Note 7. Other current assets



Current Assets [3,300+4,950+ 1,950 (4,875 × 40%)] 10,200

Total 10,200

Working Notes : 1.Computation of Goodwill S Ltd.(subsidiary) ` in lakhs Cost of Investment 1,200 Less :Paid up value of shares acquired 480 Share in pre-acquisition profits of S Ltd. (780 × 80%) 624 1,104 Goodwill 96 T (Jointly Controlled Entity) ` in lakhs Cost of Investment 900 Less: Paid up value of shares acquired (40% of 1,200) 480 Share in pre-acquisition profits (40% of 600) 240 720 Goodwill 180 Note: Jointly controlled entity ‘T’ to be consolidated on proportionate basis i.e. 40% as per AS 27



Associate Q (AS 23) ` in lakhs Cost of investment 900 Less:Paid up value of shares acquired (1,200 × 40%) 480 Share in pre-acquisition profits (400 × 40%) 240 720 Goodwill 180 Goodwill shown in the Consolidated Balance Sheet ` in lakhs Goodwill of ‘T’ 180 Goodwill of ‘S’ 96 Less: Goodwill written off of ‘S’ 96 Goodwill 180 2. Consolidated Retained Earnings ` in lakhs R Ltd. 6,000 Share in post acquisition profits of S - 80% (5,100 – 780) 3,456 Share in post acquisition profits of T - 40% (5,400 – 600) 1,920 Share in post acquisition profits of Q - 40% (5,400 – 600) 1,920 Less: Goodwill written off (96) 1,3200 3. Minority Interest ‘S’ ` in lakhs Share Capital (20% of 600) 120 Share in Retained Earnings (20% of 5,100) 1,020 1,140 4. Investment in Associates ` in lakhs Cost of Investments (including goodwill ` 180 lakhs) 900 Share of post acquisition profits 1,920 Carrying amount of Investment (including goodwill ` 180 lakhs) 2,820

22. On 31st March, 2013 BA Ltd. became the holding company of CA Ltd. and DA Ltd. by acquiring 1,800 lakhs

fully paid shares in CA Ltd. for ` 27,000 lakhs and 960 lakhs fully paid shares in DA Ltd. for ` 8,640 lakhs. On

that date, CA Ltd. showed a balance of ` 10,200 lakhs in General Reserve and a credit balance of ` 3,600 lakhs

in Profit and Loss Account. On the same date, DA Ltd. showed a debit balance of ` 1,440 lakhs in Profit and Loss

Account. While its Preliminary Expenses Account showed a balance of ` 120 lakhs.

After one year, on 31st March, 2014 the Balance Sheets of three companies stood as follows:

(` in lakhs)

Liabilities BA Ltd. CA Ltd. DA Ltd.

Fully paid equity shares of ` 10 each 1,08,000 30,000 12,000

General Reserve 1,32,000 12,600 -

Profit and Loss Account 36,000 4,800 3,000

60 lakh fully paid 9.5%

Debentures of ` 100 each - - 6,000



Loan from CA Ltd. - - 300

Bills Payable - - 600

Sundry Creditors 56,400 10,800 3,720

3,32,400 58,200 25,620

Assets

Machinery 1,56,000 30,000 8,400

Furniture and Fixtures 24,000 6,000 2,400

Investments:

1,800 lakhs shares in CA Ltd. 27,000 - -

960 lakhs shares in DA Ltd. 8,640 - -

12 lakhs debentures in DA Ltd. 1,176 - -

Stocks 66,000 12,000 6,000

Sundry Debtors 36,000 5,400 5,160

Cash and Bank balances 12,804 4,200 3,600

Loan to DA Ltd. - 360 -

Bills Receivable 780 240 -

Preliminary Expenses - - 60

3,32,400 58,200 25,620

The following points relating to the above mentioned Balance Sheets are to be noted:

(i) All the bills payable appearing in DA Ltd.’s Balance Sheet were accepted in favour of CA Ltd. out of which

bills amounting to ` 300 lakhs were endorsed by CA Ltd. in favour of BA Ltd. and bills amounting to ` 180

lakhs had been discounted by CA Ltd. with its bank.

(ii) On 29th March, 2014 DA Ltd. remitted ` 60 lakhs by means of a cheque to CA Ltd. to return part of the

loan; CA Ltd. received the cheque only after 31st March, 2012.

(iii) Stocks with CA Ltd. includes goods purchased from BA Ltd. for ` 800 lakhs. BA Ltd. invoiced the goods at

cost plus 25%.

(iv) In August, 2013 CA Ltd. declared and distributed dividend @ 10% for the year ended 31st March, 2013. BA

Ltd. credited the dividend received to its Profit and Loss Account.

You are required to prepare a Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA Ltd. and DA Ltd. as

at 31st March, 2014.

22. Solution.

Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA Ltd. and DA Ltd. as at 31st March, 2014 ` In Lakhs

Ref No.


As at 31st March,2014




1 EQUITY AND LIABILITIES




2 Minority Interest (W.N.2) 21,948



(a) Long-term borrowings 3 4,800


(c ) Other Long term liabilities




(b) Trade payables 4 70,920

(c )Other current liabilities 5 180


Total (1+2+3+4+5) 3,79,448

II ASSETS


(a) Fixed assets


(ii) Intangible assets 7 984




( c)Deferred tax assets (Net)



2 Current assets


(b) inventories 8 83,840



(c ) trade receivables 9 46,560

(d) Cash and cash equivalents 10 20,664

(e)Short-term loans and advances

(f) Other current assets 11 600

Total (1+2) 3,79,448

` In lakhs

Note 1. Share Capital As at 31st March,2014


Authorized, Issued, Subscribed and fully paid-up Share capital:-

5400 Lakhs Equity share of `10 each 1,08,000

1,08,000

RECONCILIATION OF SHARE CAPITAL

FOR EQUITY SHARE As at 31st March,2014 As at 31st March,2013

Nos. Amount(`) Nos. Amount(`)

Opening Balance as on 01.04.11 10,800 1,08,000

Add: Fresh Issue (Including Bonus shares, right shares, split shares, share issued other than cash)

10,800 1,08,000

Less: Buy Back of share

Total 10,800 1,08,000

Note 2. Reserve & Surplus As at 31st March,2014


General Reserve (WN.4) 1,33,440

Profit & Loss A/c (WN.4) 40,160

Total 1,73,600

Note 3. Long- term borrowings As at 31st March,2014


9.5% Debentures 4,800

Total 4,800



Note 4. Trade Payables As at 31st March,2014


Sundry Creditors (56,400+10,800+3,720) 70,920

Total 70,920

Note 5. Other Current liabilities As at 31st March,2014


Bills Payable 180

Total 180

Note 6. Tangible Assets As at 31st March,2014


Machinery 1,94,400

Furniture & Fixture 32,400

Total 2,26,800

Note 7.Intangible assets As at 31st March,2014


Goodwill (WN.3) 984

Total 984

Note 8. Inventories As at 31st March,2014


Stock 84,000

Less: unrealized profit 160

Total 83,840

Note 9.Trade Receivables As at 31st March,2014


Debtors (more than six months considered good) – (36,000+5,400+5,160) 46,560

Total 46,560



Note 10. Cash and cash equivalents As at 31st March,2014


Cash and bank 20,604

Cash-in-transit 60

Total 20,664

Note 11.Other current assets As at 31st March,2014


Bills receivables 1,020

Less: mutual debts(WN.5) 420

Total 600

Working Notes: (i) Calculation of pre and post acquisition profits of subsidiaries:

(` in lakhs)

Pre-acquisition capital profit Post-acquisition

General Reserve

Profit/Loss A/c

CA Ltd.

General Reserve (Cr.) 10,200 2,400

Profit and Loss A/c (Cr.) 3,600

(-) Dividend

3,000

600

4,200

10,800 2,400 4,200

Holding (60%) 6,480 1,440 2,520

Subsidiary (40%) 4,320 960 1,680

(` in lakhs)

Pre-acquisition capital profit Post-acquisition

Preliminary expenses

Profit / Loss A/c

DA Ltd.



Profit and Loss A/c (Cr.) (1,440) 4,440

Preliminary expenses (Dr.) (120) 60

(1,560) 60 4,440

Holding (80%) (1,248) 48 3,552

Subsidiary (20%) (312) 12 888

(ii) Minority Interest (` in lakhs)

CA Ltd.

Share capital 12,000

Capital profit 4,320

Revenue General Reserve 960

Profit/Loss 1,680 6,960 18,960

DA Ltd.

Share capital 2,400

Capital profit (312)

Revenue profit (Cr.) 888

Add: Preliminary expenses written off 12 900 588 2,988

21,948

(iii) Cost of Control

(` in lakhs)

CA Ltd.

Investment 27,000

Less: Dividend received and wrongly credited to Profit and Loss 1,800 25,200

Less: Paid-up share capital (60%) 18,000

Capital profit 6,480 24,480 720

DA Ltd.

Investment in Shares 8,640

in debentures 1,176 9,816



Less: Paid-up share capital (80%) 9,600

Nominal value of debentures 1,200

Capital profit (1,248) 9,552 264

Goodwill 984

(iv) Consolidated General Reserve and Profit and Loss Account (` in Lakhs)

General Reserve `

Profit and Loss A/c

`

BA Ltd. 1,32,000 36,000

Less: Wrong dividend credited - 1,800

1,32,000 34,200

CA Ltd. 1,440 2,520

DA Ltd. (3,552 + 48) - 3,600

1,33,440 40,320

Less: Unrealised profit on stock - 160

1,33,440 40,160

(v) Mutual owing regarding bills = ` (600 – 180) lakhs = ` 420 lakhs. (vi) Unrealised profit

Lakhs 125

25800x

= ` 160 lakhs (vii) Amount of dividend wrongly credited to Profit and Loss A/c = 60% of ` 3,000 lakhs = `1,800 lakhs. 23. Following are the balances in the Balance Sheet of Blue Ltd. and Green Ltd.

i. As on 31.03.2013 Equity Share Capital (`10): Blue Ltd. `80,000; Green Ltd. `1,00,000. ii. As on 31.03.2013 shares of Green Ltd. held by Blue Ltd. is `99,000.

iii. Profit and Loss A/c balances as on 31.03.2013 of Blue Ltd. is `22,000 and Green Ltd. is `30,000. iv. Net Profit during 2012-13 included in above were : Blue Ltd. `18,000; Green Ltd. `9,000. v. Both the companies have proposed a dividend of 10% which is yet to be recorded.

vi. On 01.04.2012, Blue Ltd. was formed and on the same day it acquired 4,000 shares of Green Ltd. at `55,000.

vii. On 31.07.2012, 10% dividend was received from Green Ltd. and also bonus shares at 1:4 was received. The dividend was credited to P&L A/c.

viii. On 31.08.2012 Blue Ltd. purchased another 3,000 shares of Green Ltd. at `44,000. Analyse the profit . 23. Solution.



Company Status Date of Acquisition

Holding Co.– Blue Ltd. Subsidiary Co.– Green Ltd.

Lot 1 4,000 Shares = 01.04.12 Bonus 1,000 Shares 31.07.12 Lot 2 3,000 Shares = 31.08.12

Period No. of Shares Status

Before 01.04.12 All shares acquired i.e. 80% Pre-acquisition

01.04.12 to 31.08.12 Shares acquired on 31.08.12 i.e. 30% Pre-acquisition

01.04.12 to 31.08.12 Shares acquired before 31.08.12 i.e. 40% Post acquisition

After 31.08.12 All shares acquired i.e. 80% Post acquisition

Holding Status: Holding Company = 80% Minority Interest = 20% Date of Consolidation = 31.03.2013 Analysis of Profit & Loss Account of Green Ltd. P&L balance on 31.03.2013 ` 30,000 Less: Proposed Dividend for FY 2012-13 (` 1,00,000×10)(Note 1) (`10,000) Correct Profit ` 20,000

Balance as on 01.04.2012 Balance as on 31.03.2013 `30,000 Less: Net Profit during 2012-13 (`9,000) Less: 2012-13 Dividend (`1,000) Capital Profit `20,000 Profit from 01.04.12 to 31.03.13 Profit during 2012-13 `9,000 Less: Dividend for 2012-13 (`9,000) Revenue Profit NIL Note : 1. Dividend declared and paid by Green Ltd. is `10,000 (`1,00,000 × 10%). Dividend for 2012-13 Dividend for 2012-13 `10,000 Out of Profit as at 01.04.2012 `1,000 Out of Profit for FY 12-13 `9,000 01.04.12 to 31.08.12 (5 Months) `3,750

01.09.12 to 31.03.13 (7 Months) `5,250



Consolidation of Balances

Particulars Total `

Minority Interest

`

Pre- Acquisition `

Post Acquisition

Green Ltd. (Holding 80%, Minority 20%) P&L A/c `

Equity Capital 1,00,000 20,000 80,000

Profit and Loss A/c 20,000 4,000 16,000

Proposed Dividend 10,000 2,000 1,925 (Note 2)

6,075 (Note 3)

Minority Interest 26,000

Total [Cr.] 97,925

Cost of Investment [Dr.] (99,000)

Parent’s Balance 10,000

For consolidated Balance Sheet 1,075 Goodwill

16,075

Note: 1. Pre-acquisition : [80 % × `1,000 = `800] + [30% × `3,750] = `1,925. 2. Post acquisition : [50% × 3,750 = `1,875] + [80% × `5,250] = `6,075.

24. From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended

31st March, 2014 in accordance with AS 3 (Revised) using the direct method. The company does not have

any cash equivalents.

Summary Cash Account for the year ended 31.3.2014

Particulars Amount ` ’000

Particulars Amount ` ’000

Balance on 1.4.2013 400 Payment to Suppliers 2,600

Issue of Equity Shares 1,000 Purchase of Fixed Assets 1,200

Receipts from Customers 4,500 Overhead expense 200

Sale of Fixed Assets 200 Wages and Salaries 600

Taxation 450

Dividend 100

Repayment of Bank Loan 800

_____ Balance on 31.3.2014 150

6,100 6,100

24. Solution.

X Ltd. Cash Flow Statement for the year ended 31

st March, 2014 (Using the direct method)

Particulars ` ’000 ` ’000

Cash flows from operating activities

Cash receipts from customers 4,500

Cash payment to suppliers (2,600)

Cash paid to employees (600)

Cash payments for overheads (200)

Cash generated from operations 1,100

Income tax paid (450)

Net cash from operating activities 650



Cash flows from investing activities

Payment for purchase of fixed assets (1,200)

Proceeds from sale of fixed assets 200

Net cash used in investing activities (1,000)

Cash flows from financing activities

Proceeds from issuance of equity shares 1,000

Bank loan repaid (800)

Dividend paid (100)

Net cash from financing activities 100

Net increase in cash (250)

Cash at beginning of the period (01.04.2013) 400

Cash at end of the period(31.03.2014) 150

25. (a) Radhika Corporation had been preparing value added statements for the past five years. The personnel manager of the company has suggested that a value added incentive scheme when introduced will motivate employees to better performance. To introduce the scheme, it is proposed that the best index performance, i.e., employee costs to added value for the last 5 years will be used as the target index for future calculations of the bonus to be earned. After the target index is determined, any actual improvement in the index will be rewarded, the employer and employees sharing any such bonus in the ratio 1:2. The bonus is given at the end of the year, after the profit for the year is determined. From the following details, find out the bonus to be paid to the employees ,if any, for 2014. Value Added Statement for 5 years

Year 2009 ` ‘000

2010 `’000

2011 `’000

2012 `’000

2013 `’000

Sales Less: Bought in goods & services

2,800 1,280

3,800 2,000

4,600 2,500

5,200 2,800

6,000 3,200

Added Value 1,520 1,800 2,100 2,400 2,800

Employees Cost Dividend Taxes Depreciation Debenture Interest Retained earnings

650 100 320 260

40 150

760 150 380 310

40 160

840 200 420 360

40 250

984 240 500 440

40 196

1,120 300 560 560

40 200

Added value 1,520 1,800 2,100 2,400 2,800

Summarized P & L for 2014

` ‘000 `’000

Sales Cost of material Wages Prod. Salaries Prod. Expenses Depreciation of machinery Adm. Salaries Adm. Expenses Adm. Depreciation Deb. Interest Salaries ( Sales Deptts) Sales Expenses

2,500

700 200 700 500 300 300 200

40 60

200

7,300



Dep. (Sales Deptt. Assets) 60

Profit 1,540

25. (a) Solution: Statement Showing Added Value and Amount of Bonus Paid to Employees (`’000 )

Year 2009 2010 2011 2012 2013

Employees Cost 650 760 840 984 1,120

Added Value 1,520 1,800 2,100 2,400 2,800

Percentage 42.76% 42.20% 40% 41% 40%

Target Index=40%

Working Note: Value Added Statement

(`’000)

Sales Less: Cost of bought –out goods and services: Materials Production Expenses Admn. Expenses Selling Expenses

2,500 700 300 200

730

3,700

Added Value 3,600

Employees Costs: Wages Production salaries Admn. Cost Selling Salaries

700 200 300

60

1,260

Working showing the bonus for 2014 ` ‘000

Employees cost as per Target Index %)40600,3( 1,440

Annual Employees Cost 1,260

Saving/ Improvement 180

Employees share = ` 3

2000,80,1 =`1,20,000

25. (b)

Equity Share Capital `10,00,000

Reserves & Surplus ` 3,00,000

12% Preference Share Capital ` 2,00,000

10% Debenture ` 4,00,000

Immovable property (held as investment) `1,00,000

Profit after tax `2,00,000

Rate of tax 40%

Companies with Beta factor of 1 in similar business have market rate of return 15% . Beta factor of Anant Ltd. is 1.1 calculate EVA assuming Risk Free Return-7%. 25. (b) Solution:



EVA = (Return on operating capital – weighted average cost of capital ) X Operating Capital =(12.44%-13.33%) X 18,00,000 = (16,020) Working Note – 1

Operating Capital `

Equity Share Capital Reserves & Surplus 12% Preference Share Capital 10% Debenture

10,00,000 3,00,000 2,00,000 4,00,000

Total Less: Non operating Investment

19,00,000 1,00,000

Operating Capital 18,00,000

Working Note – 2 Calculation of Return on operating Capital

`

NOPAT = Profit after Tax

+ Taxes 60/40000,00,2

2,00,000 1,33,333

+ Interest Expense

3,33,333 40,000

Operating EBIT (-) Economic taxes @ 40%

3,73,333 1,49,333

NOPAT 2,24,000

Working Note – 3

Calculation of WACC

Kd = 10% (1-0.40) X 4,00,000/19,00,000=1.26 Kp = 12% X 2,00,000/19,00,000 = 1.26% Ke = 7% + 1.1(15%-7%) = 15.8% X 13/19 = 10.81=13.33%

26. (a) From the following information in respect of Upkar Ltd., prepare a value added statement for the year 2014

`’000

Turnover Plant and Machinery (net) Depreciation on Plant and Machinery Dividends to ordinary shareholders Debtors Creditors Total stock of all materials, WIP and finished goods Opening Stock Closing Stock Raw materials purchased Cash at Bank Printing and Stationary Auditor’s remuneration Retained Profits (Opening balance) Retained Profits for the year

2,300 1,080

275 146 195 127

160 200 625

98 22 28

994 288



Rent, Rates and Taxes Other expenses Ordinary share capital issued Interest on borrowing Income tax for the year Wage and Salaries Employees State Insurance PF- Contribution

165 85

1,500 40

276 327

35 28

Calculate the Value added per employee, average earning per employee and sales per employee on the basis that 95 employees work in Upkar Ltd. 26 .(a) Solution.

Gross Value Added Statement

Sales Add: Increase in Stock (200-160) Cost of B/M Raw materials Printing & Stationary Rent Other Expenses Auditor’s remuneration Application Towards Employee (28+35+327) Interest on Borrowing Government-tax Share Holder Retained by the entity( 275+288)

625 22

165 85 28

390 40

276 146 563

1,415

Total (A) GVA

2,300

40 2,340

925 1,475

(i) Value Added= 95

415,1=14.89

(ii) 03.395

288

(iii) 21.2495

300,2

26.(b) The following is the Profit and Loss Account of Morning Glory for the year ended 31.03.2014. Prepare a Gross Value Added Statement of Morning Glory and show also the reconciliation between Gross Value Added and Profit before taxation.

Profit and Loss Account for the year ended 31.03.2014

(` in lakhs)

Notes

Amount



Income: Sales Other Income Expenditure: Production and operational expenses Administration expenses (Factory) Interest Depreciation Profit before taxes Provision for taxes Profit after tax Balance as per last Balance Sheet Transferred to General Reserve Dividend paid Surplus carried to Balance Sheet

(a) (b) (c)

(d)

- -

641 33 29 17

- - - -

45 95

140 65

205

890

55 945

- - -

720 225

30 195

10 205

- - - - -

Notes:

(a) Production and Operational expenses ` in lakhs

Consumption of raw materials Consumption of stores Salaries, Wages, Gratuities etc. (Admn.) Cess and Local taxes Other manufacturing expenses

293 59 82 98

109

641

(b) Administration expenses include salaries, commission to Directors `9.00 lakhs .Provision for doubtful debts ` 6.30 lakhs. (c)

` in lakhs

Interest on loan from ICICI Bank for working capital Interest on loan from ICICI Bank for fixed loan Interest on loan from IFCI for fixed loan Interest on Debentures

9 10

8 2

29

(d) The charges for taxation include a transfer of ` 3.00 lakhs to the credit of Deferred Tax Account. (e) Cess and Local taxes include Excise Duty, which is equal to 10% of cost of bought-in material. 26. (b) Solution. Morning Glory Gross Value Added Statement for the year ended 31st March, 2014

` in lakhs ` in lakhs

Sales Less: Cost of bought in materials and services: Production and operational expenses (293 + 59 + 109)

461

890



Administration expenses (33 – 9) Interest on working capital loan Excise duty (Refer working note)

24 9

55

549

Value added by manufacturing and trading activities Add: Other income

341 55

Total value added 396

Application of Value Added

%

To Employees Salaries, wages, gratuities etc. To Directors Salaries and commission To Government Cess and local taxes (98 – 55) Income tax To Providers of capital Interest on debentures Interest on fixed loan Dividends To Provide for maintenance and expansion of the company Depreciation General reserve Deferred tax Retained profits (65 – 10)

43 27

2

18 95

17 45

3 55

82

9

70

115

120

20.71%

2.27%

17.68%

29.04%

30.30%

396 100%

Statement showing reconciliation of Gross Value Added with Profits before taxation ` in lakhs

Profits before taxes 225

Add: Depreciation Directors’ remuneration Salaries, wages & gratuities etc. Cess and local taxes Interest on debentures Interest on fixed loan

17

9 82 43

2 18

171

Total value added 396

Working Note: Calculation of Excise Duty Say cost of bought in materials and services is ‘x’ Excise Duty is 10% of x = x/10 x = 461 + 24 + 9 + x/10 x = 494 + x/10 = 549 (approx.)* Excise Duty = 549 – 494 = ` 55 * The above calculated excise duty is not exactly 10% of cost of bought in material amounting ` 549. The difference is due to approximation. 27. (a) ABC CO. Ltd. needs $ 6,00,000 on May 1,2014 for repayment of loan installment and interest. As on December 1, 2013 , it appears to the company that the dollar may be dearer as compared to the exchange rate



prevailing on that date, $ 1= ` 43.50. assume the spot rate as on 1st

May , 2014 is $ 1= ` 44.80. Journalize in the books of ABC Co. Ltd. 27.(a) Solution.

Journal entries in the books of ABC Co. Ltd.

Date Particulars Debit Credit

1.12.2013 Premium on FEC A/c Dr. To, SWAP Bank A/c

(Being Premium Recognised) [ )50.4344(000,00,6 ]

3,00,000 3,00,000

Profit & Loss A/c Dr. To, Premium on FEC

(Being Premium written off) [153

122000,00,3 ]

2,39,216 2,39,216

1.05.2014 Loan A/c Dr. Exchange Difference A/c Dr. To, Bank (Being liability settled)

2,61,00,000 7,80,000

2,68,80,000

1.05.2014 SWAP Bank A/c Dr. To, Exchange (Being amount of exchange difference transfer)

7,80,000 7,80,000

1.05.2014 Bank A/c Dr. To, SWAP Bank A/c (Being SWAP settled)

4,80,000 4,80,000

1.05.2014 Profit & Loss A/c Dr. To, Premium on FEC (Being Premium written off)

60,784 60,784

27. (b) Mr.Dey buys a stock option of PQR Co. Ltd. in July, 2013 with a strike price on 30.07.2013 of ` 250 to be expired on 30.08.2013. The premium is ` 20 per unit and the market lot is 100. The margin to be paid is ` 120 per unit. Show the accounting treatment in the books of Buyer when: (i) the option is settled by delivery of the asset, and (ii) the option is settled in cash and the index price is ` 260 per unit. 27.(b) Solution.

Date Particulars Debit `

Credit `

At the time of inception

2013. July

Stock option premium account Dr. To Bank account (Being premium paid to buy a stock option)

2,000 2,000

Deposit for margin money account Dr. To Bank account (Being margin money paid on stock option)

12,000 12,000

At the time of settlement

August (i) Option is settled by delivery of the asset Shares of PQR Ltd. account Dr. To Deposit for margin money account To Bank account (Being option exercised and shares acquired, ` 12,000 margin money adjusted and the balance amount was paid)

25,000

12,000 13,000



Profit and loss account Dr. To Stock option premium account (Being the premium transferred to profit and loss account on exercise of option)

2,000 2,000

(ii) Option is settled in cash Profit and loss account Dr. To Stock option premium account (Being the premium transferred to profit and loss account)

2,000

2,000

Bank account (` 100 ´ 10) Dr. To Profit and loss account (Being profit on exercise of option)

1,000 1,000

Bank account Dr. To Deposit for margin money account (Being margin on equity stock option received back on exercise of option)

12,000 12,000

28. On February 1,2013 , Purushottam Ltd. entered into a contract with Sun Ltd. to receive the fair value of 1,000 Purushottam Ltd.’s own equity shares outstanding as on 31-01-2014 in exghange for payment of ` 1,04,000 in cash i.e. ` 104 per share. The contract will be settled in net cash on 31.01.2014. The fair value of this forward contract on the different dates were:

(i) Fair value value of forward on 01-02-2013 NIL

(ii) Fair value value of forward on 31-12-2013 `6,300

(iii) Fair value value of forward on 01-02-2013 ` 2,000

Presuming that Purushottam Ltd. closes its books on 31

st December each year, pass entries :

(i) If net settled is in cash (ii) If net is settled by Sun Ltd. by delivering shares of Purushottam Ltd. 28. Solution:

If net is settled in cash

Date Particulars Debit `

Credit `

(i) 1.2.2013

No entry is required because fair value of derivative is zero and no cash is paid or received

(ii) 31.12.2013 Forward Contract (asset) A/c Dr. To, Profit and Loss A/c (Loss recorded due to increase in fair value of the forward contract)

6,300 6,300

(iii)31.01.2013 Profit and Loss A/c Dr. To, Forward Contract (Asset) A/c ( Loss recorded due to decrease in fair value of the forward contract)

4,300 4,300

(iv) Cash A/c Dr. To, Forward Contract (Asset) A/c (Being forward contract settled in cash)

2,000 2,000

If net settled by delivery of shares

First three entries will be same. Entry no. (iv) will change as under:

Equity A/c Dr. To, Forward Contract (Asset ) A/c ( Being forward contract settled by delivery of shares)

2,000 2,000

29. Write a note on the following:

(a) Reversal of an Impairment Loss.



(b) Timing differences and Permanent differences.

(c) Human Resources Accounting.

(d) Major issues in environmental accounting.

29. Solution.

29. (a) Reversal of an Impairment Loss: As per AS 28 on Impairment of Assets, an enterprise should assess at each balance sheet date whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. If there is any such indication , the enterprise should estimate the recoverable amount of that asset. In assessing whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased, an enterprise should consider, as a minimum, the following indications: External sources of information (i) the asset’s market value has increased significantly during the period; (ii) there are significant changes with a favourable effect on the enterprise have taken place during the period,or will take place in the near future, in the technological market, economic or legal environment in which the enterprise operates or in the market to which the asset is dedicated; (iii) market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially. Internal sources of information (i) significant changes with a favourable effect on the enterprise have taken place during the period, or are expected to take place in the near future, to the extent to which, or manner in which, the asset is used or is expected to be used. These changes include capital expenditure that has been incurred during the period to improve or enhance an asset in excess of its originally assessed standard of performance or a commitment to discontinue or restructure the operation to which the asset belongs; (ii) evidence is available from internal reporting that indicates that the economic performance of the asset is, or will be, better than expected 29. (b) Timing and Permanent Differences: As per AS 22 states that timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. Unabsorbed depreciation and carry forward of losses which can be set off against future taxable income are also considered as timing differences and result in deferred tax assets subject to consideration of prudence i.e., deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently. For instance, if for the purpose of computing taxable income, the tax laws allow only a part of an item of expenditure, the disallowed amount would result in a permanent difference. 29. (c) Human Resource Accounting (HRA): Human Resource Accounting (HRA) is an attempt to identify, quantify and report investments made in human resources of an organization. Leading public sector units like OIL, BHEL, NTPC and SAIL etc. have started



reporting human resources in their annual reports as additional information. Although human beings are considered as the prime mover for achieving productivity, and are placed above technology, equipment and money, the conventional accounting practice does not assign significance to the human resource. Human resources are not thus recognized as ‘assets’ in the Balance Sheet While investments in human resources are not considered as assets and not amortised over the economic service life, the result is that the income and expenditure statement comprising current revenue and expenditure gives a distorted picture of the real affairs of the organization. Accountants have been severely criticized by the Behavioural Scientists for their failure to value human resources, as this has come out as a handicap for effective management. Human resource accounting provides scope for planning and decision making in relation to proper manpower planning. Also, such accounting can bring out the effect of various new rules, procedures and incentives relating to work force, and in turn, can act as an eye opener for modifications of existing statutes and laws. 29.(d) Major accounting issues involved in environmental accounting can be explained as follows: (i) Distinction between environmental expenditure and normal business expenditure: Many new machines may incorporate state-of-the-art environmental technology and accordingly, portion of such capital costs and also the running and maintenance expenditure may be treated as environmental expenditure. It is necessary to frame guidelines indicating whether the reporting entity should properly allocate the capital and revenue expenditures between environmental expenditure and normal business expenditure. (ii) Whether to capitalise environmental expenditures or expensing them during the current accounting period: Environmental protection costs relating to prior periods and current period are generally very high and if expensed in one year as and when a reporting entity is persuaded to follow environmental accounting, the adverse impact in EPS is a major concern. Accordingly many Western Corporations prefer to capitalize environment costs instead of immediate expensing and adopt an amortization policy extending up to 10 years. Although this accounting practice has no theoretical support and rather contradicts the well established accounting concept of “prudence”, it is considered as a practical solution to off-load burden of accumulated environmental costs without abruptly disturbing the cash flows attributable to the lenders, Government and finally to the shareholders. However, recognition of environmental costs should not necessarily be restricted to the expenses accrued in view of the applicable environmental laws. It should be guided by ethical consideration. (iii) Recognition of environment related contingent liabilities: Environmental contingent liabilities are a matter of increasing concern throughout the world. Recognizing a liability of hazardous waste remediation frequently depends on the ability to estimate remediation costs reasonably. In fact, identification and measurement of contingent liabilities are highly debatable accounting aspects. The United Nations Conference on Environment and Development (UNCEAD) papers raise the basic question why environmental contingencies should not be merged with other business contingencies. There is an urgent need for tightening the reporting rules on contingencies incorporating specific requirements for disclosure of environmental contingencies along with other contingencies. 30. Write a note on the following:

(a) Discuss the concept of Cost v/s Fair value with reference to Indian Accounting Standards.

(b) Advantages of preparation of Value Added (VA) statements.

(c) Impairment of asset and its application to inventory.

(d) Briefly describe the significance of Environmental Accounting.

30. Solution.

30.(a) Cost vs. Fair value: Meaning of Cost basis: The term cost refers to cost of purchase, costs of conversion on other costs incurred in bringing the goods to its present condition and location. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition.



Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. Meaning of Fair value: Fair value of an asset is the amount at which an enterprise expects to exchange an asset between knowledgeable and willing parties in an arm’s length transaction. Indian Accounting Standards are generally based on historical cost with a very few exceptions: AS 2 “Valuation of Inventories” – Inventories are valued at lower of net realizable value (NRV) and cost of inventories . AS 10 “Accounting for Fixed Assets” – Items of fixed assets that have been retired from active use and are held for disposal are stated at net realizable value if their net book value is more than NRV. AS 13 “Accounting for Investments” – Current investments are carried at lower of cost and fair value. The carrying amount of long term investments is reduced to recognise the permanent decline in value. AS 15 “Employee Benefits” – The provision for defined benefits is made at fair value of the obligations. AS 26 “Intangible Assets” – If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident. AS 28 “Impairment of Assets”– Provision is made for impairment of assets. On the other hand IFRS and US GAAPs are more towards fair value. Fair value concept requires a lot of estimation and to the extent, it is subjective in nature. 30.(b) The various advantages of preparation of Value Added (VA) Statements are as under: (i) Reporting on VA helps to improve the attitude of employees towards their employing companies. This is because the VA statement reflects a broader view of the company’s objectives and responsibilities. (ii) VA statement helps the company to introduce a productivity linked bonus scheme for employees based on VA. The employees may be given productivity bonus on the basis of VA / Payroll Ratio. (iii) VA based ratios (e.g. VA / Payroll, taxation / VA, VA / Sales etc.) are useful diagnostic and predictive tools. Trends in VA ratios, comparisons with other companies and international comparisons may be useful. (iv) VA provides a very good measure of the size and importance of a company. To use sales figure or capital employed figures as a basis for company’s rankings can cause distortion. This is because sales may be inflated by large bought-in expenses or a capital-intensive company with a few employees may appear to be more important than a highly skilled labour–intensive company. (v) VA statement links a company’s financial accounts to national income. A company’s VA indicates the company’s contribution to national income. (vi). VA statement is built on the basic conceptual foundations which are currently accepted in balance sheets and income statements. Concepts such as going concern, matching, consistency and substance over form are equally applicable to VA statement. 30.(c) The objective of AS 28 ‘Impairment of Assets’ is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Statement requires the enterprise to recognize an impairment loss. This standard should be applied in accounting for the impairment of all assets, except the following (i) inventories (AS 2, Valuation of Inventories); (ii) assets arising from construction contracts (AS 7, Accounting for Construction Contracts); (iii) financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; (iv) deferred tax assets (AS 22, Accounting for Taxes on Income). AS 28 does not apply to inventories, assets arising from construction contracts, deferred tax assets or investments because other accounting standards applicable to these assets already contain specific requirements for recognizing and measuring the impairment related to these assets



30. (d) Environmental Accounting can be defined as a Shiva for measuring environmental performance and communicating the results of these measurements to users. It helps in presenting the utilization of natural resources by an enterprise, the costs incurred to use them and the income earned therefrom in a transparent manner. Environmental accounting is entirely a new concept and a faithful attempt to identify the resources exhausted and the costs rendered reciprocally to the enterprise by a business corporation. Thus environmental accounting stands for recording and documenting environmental performance to facilitate effectiveness of environmental management Shiva with reference to compliance, safety and quality control. It provides a data base for taking corrective steps and future action for developing organisation’s environmental strategy and for identifying environmentally based opportunities for gaining an edge over one’s competitors. If proper environmental accounting Shiva is established, the enterprise will be able to anticipate environmental damage and therefore can prevent it from happening.

paper 16 advanced financial accounting and reporting · paper 16 – advanced financial accounting...

Documents